In management, to finance means to provide the money needed for a company to develop their activities. In this sense, companies finance themselves by three different ways: by internally generated cash flows, by debt financing or by equity financing.

Firstly, internally generated cash flows are the most important way of financing. Because is the way that provides security and feasibility to the company. The principal advantage of this method of financing is that the businessman could do whatever he wants with them. But the main problem of internally generated cash flows is that they are limited, by contrast, company’s needs are unlimited.

The next step that companies do to get money is to borrow it from banks or issuing bonds. That is usually called debt financing. The different between debt financing by bonds or by loans is that you could get money cheaper issuing bonds. The reason of that is that the judge of the interest rate is the market not banks. The main feature and advantage of debt financing is that bond interest is tax deductible. However, increase debt increases financial risk.

Finally, equity financing is the other method that companies use to finance their activities. Issuing new shares is the principal form of equity, normally is used by companies to expand themselves. Those shares are offered first to old shareholder, and later on, they go into the market. The main characteristic is that those shares issued by a certain company will be sold with certain ease. Nevertheless, the money obtain by shares fluctuates a lot, so companies should not abuse of this way of financing.

In closing, I would like to remark how important the financing department is into any company. The success of company begins in a correctly financing, because getting money is the first step to develop your ideas.

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