Funding - what is it?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Sometimes an enterprise does not have enough of its own resources to carry out entrepreneurial activities, so it resorts to the funding procedure. The latter is a kind of guarantee of success and the ability to stay afloat in today's competitive business environment.

Definition of concept

Funding is, first of all, the attraction of borrowed resources, which are used by enterprises in order to ensure uninterrupted maintenance of their activities in accordance with the main direction.

Thus, for an enterprise conducting non-commercial activities, the main source of funding will be philanthropists or the state. With the funds raised, the organization can maintain its own funds, which in this case are closed kindergartens, private homes for the elderly or cultural circles and communities.

For the state, in turn, the source of funding is the tax obligations of payers. With the proceeds, it supports non-profit organizations such as hospitals and educational institutions. It should be noted that the concept of funding for the country is fully consistent with the planned economy regime.

For commercialFunding of companies is the attraction of funds from parent organizations. In the case of insurance activities, the main financial fund is the funds of policyholders.

Main methods

If we rank the funding process according to accrual methods, it can be divided into the following categories:

• prospective methods;
• accrual methods.

Thus, in the prospective aspect, the effectiveness of the loan 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 few years of the employee, and deposit rates in banks depend on the amount of funds raised for the reporting period under review (of course, this is not the only criterion for determining this indicator).

In terms of accrual methods, funding is the amount of borrowed funds that has been credited throughout the entire commercial activity of the enterprise. In other words, according to the method under consideration, the insurance company's payout fund will depend on how many premiums were paid by policyholders for the entire period of the enterprise's operation. In the case of state funding, the amount of social payments will depend on the amount of taxes paid to the treasury.

How the funding rate is 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 waylanguage.

The net amount of funds raised is not the net value of borrowed funds, so the funding rate is calculated depending on the mass of indicators:

• influential market indicators are taken into account;
• taking into account the profitability of the enterprise;
• weighting the ratio of assets and liabilities taking into account costs;
• an expert assessment of asset maturity is involved.

At the same time, the funding rate does not have a clear period of relevance, and the settlement period for the cost of borrowed resources is chosen at the discretion of the enterprise: be it once a day, week or year.

After determining the funding rate, the resulting indicator is taken into account when determining the solvency of an enterprise that carries out its main activity by attracting borrowed funds.

Determining the cost

The cost of funding is the rate at which borrowed funds are attracted to 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 of funds raised, however, as described above, this statement is incorrect, since the cost is a direct transfer price, which determines at what percentage the company can afford raise borrowed funds.

This indicator also depends on many factors and is calculated using a complex formula, howeverIn short, we can say that when determining the cost of funding, the currently available amount of funds raised, market demand, supply and stock indicators are taken into account.

Therefore, often interest rates on loans and deposits in a bank depend on a mass of indicators and indicators, and not on how much a competitor offers, as many of us used to think.

The concept of funding ratio

The funding ratio is an indicator that is determined as a result of 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 exceed liabilities in their quantitative ratio, and the coefficient is greater than one, we can conclude that the risks of the enterprise are currently small, and nothing threatens its functioning. In other words, the activity of the enterprise is stable and capable of generating a constant income.

If liabilities dominate assets in their total ratio, the conclusion suggests itself that the risks of the main activity of the enterprise are quite large, and profitability is under threat. This may result in low interest rates for raising borrowed capital in the bank or the inability of the insurance company to make payments.

Bank funding

Funding of banks is the attraction of borrowed capital for the implementation of 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 carry out lending in full, especially when it comes to legal entities. Therefore, deposits are attracted for normal activities.

Each of you must have noticed that bank lending rates often depend on deposit rates or vice versa. Therefore, if loan rates grow, then the deposit rate of return cannot decrease - this is the first principle of funding.

A huge number of enterprises are able to manage with their own funds without involving the funding procedure, but not banks. Banking always involves borrowing money.

Document funding

The funding procedure does not always have an economic aspect, and in the organization of office work, this term also has a fairly significant impact and meaning. 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 a certain frequency - once a year, quarter or month (depending on the amount of existing information). Funding of documents, as a rule, is carried out by registers. These could be:

• signatories;
• surnames of addressees;
• contents.

In general, there are no clear rules and legislative acts regarding the funding procedure according to registers, so the clerk can choose the most convenient and optimal archiving method 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 the insurance company use to pay out if there were no insurance premiums? And social services would not be able to pay benefits if there were no tax system in the country.