Final answer:
A firm should plan its expenditures first to understand its financial needs before seeking financing sources. This allows for a targeted approach to selecting the appropriate forms of financial capital, such as early-stage investors, reinvesting profits, loans, or stock offerings. A well-crafted budget and financial plan set the stage for informed decision-making regarding investment and financing strategies.
Step-by-step explanation:
When determining what comes first between planning expenditures and finding financing sources, it is generally more prudent to plan expenditures first. Firms that make decisions about expenditures are usually planning to spend money now with the expectation of generating profits in the future. These expenditures could involve purchasing machinery, constructing new facilities, or investing in research and development. By determining these needs first, a firm can then seek out appropriate financial capital sources tailored to their specific requirements and timelines.
Firms have four main ways to raise financial capital: through early-stage investors, by reinvesting profits, by borrowing through banks or bonds, and by selling stock. Understanding the amount and timing of the planned expenditures, a business can then reach out to suitable sources of financing that align with its strategic objectives and payment capacities. For example, if a firm is just starting out and has yet to show profitability, early-stage investors might be a suitable option. On the other hand, a well-established firm with steady cash flows might find reinvesting profits or borrowing from banks more appropriate.
Additionally, creating a budget is crucial for balancing income and expenses. Before a firm decides on which financial sources to engage, they need a clear financial plan that includes investment strategies, risk management, and understanding the costs and benefits of using credit. This comprehensive approach ensures that financial decisions support the overall economic goals of the organization.