Business Case Research By Latanya Pope

business case research 4 Business Case Research Latanya Pope Carol Sommers 4/8/2023 Why funding is needed for Amazon?

There are two major driving forces that contribute to the need for Amazon to raise funds. The first main reason for funding is to raise working capital. A company's financial health is largely dependent on its working capital, and insufficient working capital can have a significant impact on the company's future. To acquire sufficient working capital to enable them to realize their growth goals, many businesses opt to apply for external funding.

A loan can help Amazon meet its funding obligations by covering short-term funding needs and giving it the money, it needs to grow. It can also bridge the gap between supplier payments and orders from customers. According to the British Business Bank's 2019 Business Funding Survey, the most common reason that small businesses seek funding is for working capital (Black et al, 2021). The second main reason for raising funds is to enable Amazon to support start-up associate businesses. Amazon serves as a platform in which startup businesses grow in.

To get their feet on the ground, new businesses need a lot of money. Even though some business owners start their companies with their own money, it can be hard for them to make money on their own. Therefore, most entrepreneurs look for outside financing for their business, all things being equal. Entrepreneurs can obtain external funding in a variety of ways, including applying for bank loans, borrowing money from friends and family, and more. To expand, almost every business needs assets.

Investing in business-essential assets is one of the primary uses of business funding. This could include anything the business needs to run, like vehicles, machinery, IT equipment, or anything else. Just make sure the return on investment makes sense when planning business funding around the purchase of assets. Sources of Funding Self-funding: This refers to a funds raising plan in which Amazon raises the funds on its own. The main source of self-funded funds is from retained earnings.

Retained earnings refer to the profits and proceeds that remain after deducting the expenses and liabilities from the net profits and income. This form of funding has certain benefits such as greater flexibility and control. The organization has a choice to control various decisions and policies on financial management in the organization (Mazzarol et al, 2020). It reduces dilution of control due to maintaining minimum managerial influence. Borrowing: This source of funding involves the use of financial lenders and institutions in providing finances needed by the organization.

Although Amazon will increase the current level of financial liabilities due to interest charged on the borrowed funds, it has an added advantage of reduced taxation. Requirements In self-funding, the organization must have a reliable financial reporting framework that ensures precision in recording financial transactions. Also, the source of funds withdrawn must be well-defined in the accounting procedures used in the organization. In borrowing, Amazon must be assessed on its credibility in meeting financial obligations set. This involves determining the current level of leverage as well as determining the level of collateral in the organization.

Associated risks Self-funding is faced with a major risk of reduced risk diversification. This refers to the potential risk that is incurred when an adverse event occurs in the organization. With self-funding, Amazon will be the sole investor or sponsor in the project. This means the company holds a major risk of incurring losses because of uninsured events that put the proposed project to a halt. Borrowing funds carries some risks as a funding strategy.

One of the risks is the business can lose assets because of default. If the company fails to pay interest on time, the financial lenders have a right to take over the assets and collateral to the loaned funds. Also, the company increases its liabilities as a result of the increased number of liability items in the organization’s financial statement (Gupta & Ongena, 2022). Best funding source The preferred source of funds depends on the timeline in which the obligations of the funds fall due. Amazon can have different sources of funds depending on when the funds are to be serviced.

Based on a comparison of the two sources of funds identified in the analysis, the most suitable source of funds for the company on a short-term basis is borrowed funds. Given that Amazon has experienced a decline in working capital, there is a need to focus on a channel that is more of providing short-term lending basis while maintaining significant retained earnings for future expansion. Borrowing provides an added advantage of reduced taxation due to interests’ deduction. This increases profitability, which also boosts retained earnings level in the organization. However, on long term basis, the company should focus on self-funding.

This funding strategy ensures low dilution of the company’s control as a result of additional shareholder’s interests. Cost of capital Cost of borrowing Short term funding source (borrowing): 3,000,000 Long-term funding source (long-term): 2,500,000 Current APR Short term funding source (borrowing): 12% Long-term funding source (long-term): 12%

References

• Black, S., Jackman, B., & Schwartz, C. (2021). An Assessment of the Term Funding Facility. RBA Bulletin, September.
• Gupta, M., & Ongena, S. (2022). The Impact of the SBA Funding Programs on the Distance and Pricing of Loans to Small Businesses. Swiss Finance Institute Research Paper, (22-31).
• Mazzarol, T., Reboud, S., Mazzarol, T., & Reboud, S. (2020). Workbook: Financing the Venture. Workbook for Entrepreneurship and Innovation: Theory, Practice and Context.