The application of working capital, also referred to as the source and application of funds statement or the statement of changes in financial position, shows the sources of funds raised between balance sheet dates and the uses of those funds. It serves as a connection between the balance sheet at the beginning of an accounting period, the profits and losses for the period, and the balance sheet statement at the end of the period.
The statement is divided into two parts. The source indicates where the money for the business came from, either due to a decrease in assets or an increase in liabilities. The source of the funds can also derive from net income, loans, shares, repayments, and decreased working capital. The second section, the application, indicates how the money was spent, either due to an increase in assets or a decrease in liabilities. The application of funds also derives from company losses, loans granted, taxes, addition of fixed assets, loan payments, and increased working capital.
The application of working capital is vital tool used to determine the profitability of a company. It is useful to quick business funding owners who employ it to evaluate trading trends, analyze the effectiveness of investment decisions and understand the costs of maintaining the business. Financial institutions and shareholders also utilize the application of working capital to determine if a company is profitable enough to invest in.
An alternative business funding resource generally refers to the non-traditional means by which a business owner can obtain capital to start or operate a business. These methods are usually considered when individuals cannot obtain traditional funding, such as bank loans. In many cases, alternative funding can be more beneficial to a business owner when compared to traditional funding.
The most common type of alternative business funding resource is through debt funding. This means that an individual borrows from friends or family, obtains an equity loan, borrows against a 401(k) plan, or uses credit cards. Loans from friends or family are often arranged so that the borrower does not have to pay interest. An equity loan is a personal secured loan that uses the borrower’s home as collateral. When individuals borrow against their 401(k) plan, essentially they are borrowing their own money. This type of alternative business funding resource can result in additional taxes or fines by the federal government if the funds are not repaid. Funding through credit card debt is usually not a good idea unless business owners are able to pay off the balances on time and still maintain a profit.
Another alternative business funding resource is a private investor. Private investors will agree to supply a business with a certain amount of capital in exchange for a percentage of the business’s profits. The goal for most private investors is to eventually purchase the business they invested in to make a higher profit.