Sometimes an enterprise does not have enough of its own resources to carry out entrepreneurial activity, therefore it resorts to the funding procedure. The latter is a certain guarantee of success and the ability to stay afloat in a modern competitive business environment.
Definition of a concept
Funding is primarily the attraction of borrowed resources that enterprises use to ensure uninterrupted provision of their activities in accordance with the main direction.
Thus, for an enterprise conducting non-profit activities, the main source of funding will be sponsors or the state. The organization may use its own funds to raise funds, which in this case are closed-type kindergartens, private homes for the elderly, or cultural circles and communities.
For the state, in turn, the tax liabilities of the payers are a source of funding. With the funds received, it contains such non-profit organizations as hospitals and educational institutions. It is worth noting that the concept of funding for a country is fully consistent with the regime of a planned economy.
For commercial companies, funding is raising funds from parent organizations. In the case of insurance activities, the main financial fund is the funds of insurers.
Main methods
If you rank the funding process according to accrual methods, then it can be divided into the following categories:
- prospective methods;
- accrual methods.
Thus, in a prospective aspect, the efficiency of a borrowed fund in a rough formulation is a derivative of the amount of accrued funds for the last period. In other words, pensions are accrued according to the amount of wages for the last several years of work, and deposit rates at banks depend on the amount of funds raised for the reporting reporting period (of course, this is not the only criterion for determining this indicator).
If we take into account accrual methods, then funding is the amount of borrowed funds that was credited throughout the entire business of the enterprise. In other words, according to the method under consideration, the payout fund of the insurance company will depend on how many premiums have been paid by policyholders for the entire period of the enterprise. In the case of state funding, the amount of social payments will depend on the amount of taxes paid to the treasury.
How is the funding rate determined?
The funding rate is the total cost of borrowed resources, which is calculated using a complex formula, but let's try to simplify this concept and explain everything in an accessible language.
The net amount of borrowed funds is not the net cost of borrowed funds, so the funding rate is calculated depending on the mass of indicators:
- influential market indicators are taken into account;
- the profitability of the enterprise is taken into account;
- the ratio of assets to liabilities is weighted, taking into account costs;
- an expert assessment of the urgency of assets is involved.
At the same time, the funding rate does not have a clear period of relevance, and the estimated period of the cost of borrowed resources is selected at the discretion of the enterprise: be it once a day, week or year.
After determining the funding rate, the obtained indicator is taken into account when determining the solvency of an enterprise that carries out its core business by attracting borrowed funds.
Cost determination
The cost of funding is the rate at which borrowed funds are raised in the capital of the enterprise, so do not confuse the concepts of “funding rate” and “cost”.
Of course, it would be more logical to decide that the rate is the percentage estimate of the borrowed funds, however, as described above, this statement is incorrect, since the cost is the direct transfer price, which determines the percentage at which the company can afford to borrow money.
This indicator also depends on many factors and is calculated according to a complex formula, but in a nutshell it can be said that when determining the funding cost indicator, the current amount of borrowed funds, market demand, supply and exchange indicators are taken into account.
Therefore, often interest rates on loans and deposits in the bank depend on the mass of indicators and indicators, and not on how much the competitor offers, as many of us are used to think.
The concept of funding ratio
The funding ratio is an indicator that is determined by calculating the ratio between the assets and liabilities of an enterprise in national currency. Thus, the company can calculate the volume of risks of its core business as of the date of the reporting period.
In the event that assets in quantitative terms exceed liabilities and the ratio is greater than unity, we can conclude that the risks of the enterprise are currently small and that nothing is threatening its functioning. In other words, the activity of the enterprise is stable and capable of generating constant income.
If liabilities dominate assets in their total ratio, the conclusion is that the risks of the main activities of the enterprise are quite large, and profitability is at risk. Low interest rates on borrowing capital from a bank or the inability of the insurance company to make payments may flow from this.
Bank Funding
Bank funding is the attraction of borrowed capital to carry out further core activities.
In general, we can say that absolutely any bank practices the funding procedure, otherwise its activities will be impossible. The bank, as a rule, does not have enough equity capital to fully lend, especially when it comes to legal entities. Therefore, for normal activities, deposits are attracted.
Each of you must have noticed that bank lending rates often depend on deposit rates or vice versa. Therefore, if interest rates on loans increase, then the deposit interest rate of return cannot decrease - this is the first principle of funding.
A huge number of enterprises are able to manage their own funds without involving the funding procedure, but not banks. Banking always involves borrowing.
Funding Documents
The funding procedure does not always have an economic aspect, and in the organization of office work this term also has a fairly significant influence and significance. In documentary practice, it is generally accepted that funding is the so-called archiving of documents for previous periods of an enterprise.
The archiving procedure can be carried out with some periodicity - once a year, quarter or month (depending on the amount of existing information). Funding for documents is usually carried out by register. It can be:
- signatories;
- surnames of addressees;
- content.
In general, there are no clear rules and legislative acts regarding the funding procedure according to the registers, so the clerk can choose the most convenient and optimal way of archiving for himself.
conclusions
In conclusion, I would like to note that funding is an integral process in the implementation of entrepreneurial activities of many enterprises, otherwise how would we use bank loans if there were no deposits? What funds would an insurance company make payments if there were no insurance premiums? And social services could not pay benefits if there weren’t a tax system in the country.