Factors affecting the sources of finance

Need to know

What you need to know

• Capital expenditure (for non-current assets) should be financed by long-term sources.
• Revenue expenditure (for working capital) should be financed by short-term sources.
• The amount of finance needed can make certain sources, like a public share issue, unsuitable or not cost-effective.
• A mismatch between the purpose and the source can lead to financial inefficiency and risk.

Explanation

Factors affecting the sources of finance

1. Capital expenditure (for non-current assets) should be financed by long-term sources.
2. Revenue expenditure (for working capital) should be financed by short-term sources.
3. The amount of finance needed can make certain sources, like a public share issue, unsuitable or not cost-effective.
4. A mismatch between the purpose and the source can lead to financial inefficiency and risk.