Final answer:
Firms finance operations primarily by reinvesting retained earnings to purchase equipment, expand facilities, and fund research and development. When internal funds are insufficient, they may borrow from banks, issue bonds, or sell stock, which affects the company's financial structure and growth strategies.
Step-by-step explanation:
Firms primarily finance their operations by reinvesting retained earnings, which are profits not distributed to shareholders. When a company earns more money than it spends, it can use this excess to invest in growth, such as purchasing new equipment, expanding facilities, and funding research and development. This form of internal funding is significant because it allows companies to grow without accruing debt or diluting ownership through issuing new stock.
However, relying solely on retained earnings may not be feasible for all companies, especially new ones with limited profits or those experiencing a temporary downturn. In such cases, firms may require external sources of capital. Firms can procure additional financial resources by borrowing from banks or issuing bonds, where they promise to pay back with interest, or through selling stock to investors. The chosen method impacts both the firm's financial structure and its strategies for future growth.