Question

list and briefly discuss the three main strategies that companies use to finance operations. For each of the strategies, indicate the risk level to the company.

Answer 1

Finance is like the blood of the business which needs to go through each vein to function it properly. Companies at varied stages of their level and operations needs cash and is the primary requisite for every company;s operation. Company with poor cash flows due to poor financial management can suffer a great deal no matter how profitable they are on books. Out of the many strategies, the three main strategies for me are:

• Reserve policy is the one in which company ascertains an amount they would like to keep as bare minimum threshold to run their operations in case of severe cash crunch. The level of risk is minimum in this although it requires frequent review and revision.
• Core costs policy – what method will be used to recover program support costs from projects and funders. It will also clarify the policy on subsidizing ‘poorer’ projects and how that will be decided and managed. Example: It is our policy to apportion overhead costs to projects on a monthly basis, in proportion to the direct costs incurred by each project. Each project should generate enough income to cover both its direct and apportioned indirect costs, unless the Board authorizes otherwise for particular cases. The risk here is that company may
• Provide share options to key employees and directors rather than cash salaries as major part of their package to save on cash in hand and use it for the other activities. The level of risk to the company is moderate here