Benefits-Drawbacks

What Is Debt Financing ?

Debt financing is just opposite of equity financing.(in which capital is raised by selling equity instruments to the investors). It is a process of raising fund by selling debt instruments such as bond, credit cards, debentures etc. It is a borrowing of money and should be paid back with interest. In this post we are going to discuss some major pros and cons of debt financing.

Advantages Of Debt Financing

The main advantages of debt financing can be pointed out as follows:

1. Ownership And Control

One of the main advantages of debt financing is that it does not dilute ownership and control like in equity financing. Ownership, management control remains with the company because lenders have no right to manage the company.

2. Decreased Tax Obligation

Debt is considered as expenses in business. So, interest on loan is tax deductible. So, it minimizes the tax obligation.

3. No Share Of Profit

Another benefit of debt financing is that company can enjoy entire profit because lenders cannot claim on the profit of the firm.

4. Improves Credit Rating

If a firm pays loan and interest on time, it improves the credit rating of the business, It increases the reputation and image of the company.

5. Flexibility

It is more flexible than equity funding. There are several debt instruments such as loan, debenture, bills, credit card etc. Companies can choose best debt financing option as per the nature of the business.

Disadvantages Of Debt Financing

The main drawbacks or disadvantages of debt financing are as follows:

1. Impact On Cash Flow

As we know that certain amount of loan and interest should be paid in each month until the last installment, it may negatively impact cash flow. It may hamper daily operational activities because of lack of adequate working capital.

2. Complex Process

It is difficult to raise capital with debt financing. It requires strong credit history to attract lenders. So, it is not suitable for small and new business firms.

3. Need Of Collateral

Another disadvantage of debt financing is that company may need to provide collateral (fixed assets such as land, building, machinery) etc. to secure loan. If the company fails to repay the loan lenders can acquire the assets.

4. Strict Discipline

It requires strict discipline to repay the loan. If a firm fails to repay the loan on time it negativels affects the credit rating and image of the firm.

Also Read

Advantages and disadvantages of equity financing

5. Not Suitable

Debt financing is not suitable for the business having inconsistent cash flow because it make difficult to pay the loan and interest regularly.

Pros And Cons Of Debt Financing In Short

Pros

- Firms retain ownership and control

- It increases the credit rating of the firm 

- Firm can enjoy 100% profit

- It decreases the tax liability

- Liability is over after paying the loan

Cons

- It is risky and complicated than equity financing

- It may impact cash flow of the firm

- Firms may have to pay high rate of interest

- It is not suitable for small business

- It requires collateral to get loan

What Is Equity Financing ?

Equity financing (also called equity funding) is a process of raising capital by selling equity instruments like ordinary shares, preference shares etc. Companies issue share to investors to raise money for business. It is effective tool that helps to meet short-term or long-term obligation of the firm.

Advantages Of Equity Financing

The main advantages of equity funding can be pointed out as follows:

1. Less Risky

Equity financing is less risky method of financing than debt because firms do not require to repay loan and interest on the raised capital.

2. No Additional Burden

Another benefit of equity financing is that it does not suffer the company with financial burden like monthly repayment of loan and interest.

3. Opportunity To Grow

As we know that firms do not have to repay loan, so firms can invest more money to expand business. Therefore, it provides the opportunity to grow.

4. Raising More Fund

Equity financing can raise more capital than borrowing. So, it is more favorable option than debt financing.

5. Attract Investors

It can increase credibility and image of the company if the raised fund is invested properly. It helps to attract more investors and partners in the future.

Disadvantages Of Equity Financing

The main disadvantages of equity financing can be highlighted as follows:

1. Sharing Profit

One of the major drawbacks of equity finance is that company founders cannot enjoy 100 % profit because it should be share with the shareholders.

2. Costly Method

Equity financing is costlier than borrowing because of higher risk and no tax shield.

3. Sharing Ownership And Control

Another disadvantage of equity financing is that company should share ownership with the shareholders. So, it limits the power and control of founders.

Also Read

Advantages and disadvantages of debt financing

4. Possibility Of Conflict

Because of shared ownership, control and power there exists a possibility of conflict between investors and owners of the company.

Pros And Cons Of Equity Financing In Short

Pros

- It is less riskier than debt financing

- It avoids the financial burden of the firm

- It provides expansion and growth opportunity

- It can raise more capital than borrowing

- It lowers the credit problems

Cons

- It splits the ownership and profit

- It is complex and costly method of raising capital

- It may create conflict between shareholders and owners

- It lacks tax shield

- It is time consuming process

What Is ChatGPT ?

ChatGPT ( Chat Generative Pre-trained Transformer) is an AI chatbot build by using machine learning technology. This artificial intelligence tool is designed and developed by an American research organization called Open AI . The main feature of ChatGPT is that it generates human-like responses because it is trained on vast amount of data. It can perform various tasks such as writing texts, generating codes, composing lyrics, solving complex mathematical problems, creating content etc.

Benefits Or Advantages Of ChatGPT

The main advantages of using ChatGPT can be highlighted as follows:

1. Saving Of Time And Effort

One of the main features of ChatGPT is that it can generate quick response that helps the users to complete complex tasks or problems within few seconds. Therefore, it saves time and effort.

2. Cost-effective Tool

ChatGPT minimizes the need of manual labor to perform several tasks. It helps the companies to save their resources by automating the tasks that helps to save costs.

3. Eliminates Tedious Manual Process

Another advantages of using ChatGPT is that it eliminates tedious manual jobs and process. It can perform complex tasks quickly with high level of accuracy. It also increases the efficiency  minimizing the human interventions.

4. 24/7 Availability

ChatGPT is available at any time and works 24 x 7 endlessly without any breaks. So, it is a convenient tool that helps people to perform their tasks  when needed.

5. Promotes Innovation

It can be used in different fields such as business, marketing, education, healthcare, banking etc. to improve efficiency and productivity. It helps the companies to analyze vast amount of data to improve the performance and to create new ideas. So, it promotes innovation.

6. Wide Range Of Topic

ChatGPT can be used for various purposes such as content writing, coding, solving mathematical problems, making lyrics, writing resumes etc. So, users can get information on wide range of topics.

7. Helps In Fraud Detection

It helps the organization to detect fraud by analyzing the text data. Therefore, it is useful to prevent scams, phishing and fraudulent in the company.

8. Personalized Response

ChatGPT is a powerful tool that provides personalized responses to it users. Different users get unique solutions in a different way. 

Drawbacks Or Disadvantages Of ChatGPT

The main disadvantages of ChatGPT can be described as follows:

1. Limited Knowledge

ChatGPT is in initial stage and has limited knowledge and data about latest events and latest technology. So, it may lack accuracy and reliability in some cases.

2. Not Able To Handle All Tasks

As we know that it is trained on large volume of text data, ChatGPT is capable to generate responses on the basis of those data only. It cannot be used for tasks that require logical abilities such as decision making or reasoning capabilities.

3. Possibility Of Misuse

Another notable disadvantage of ChatGPT is that users may misuse this tool for cheating, scamming, phising, and spreading rumors and false information.

4. It Lacks Creativity

It provides response on the basis of data that are used to train this tool. It lacks creativity and cannot generate new and fresh ideas.

5. May Hamper Creativity

Although it helps people to get required solutions to their problems, it may hamper their creativity, thinking capability and hard working habit. Therefore, it may make people lazy.

6. Unemployment Problem

ChatGPT may replace human interventions by automating tasks. Companies try to replace individuals with this tool that may increase the rate of unemployment in the near future.

7. Lacks Emotional Intelligence

As we know that this tool provides responses on the basis of pre-fed-data, it fails to perceive emotions. So, it is not able to understand users emotions and feelings.

Pros And Cons Of ChatGPT In Short

Pros:

- It saves time, money and effort

- It increases the efficiency and productivity

- Can be used at anytime without any difficulty

- It provides wide range of topics

- It promotes innovation

Cons:

- It may lack reliability and accuracy

- It may hamper people's creativity and thinking habit

- May create unemployment problem

- There is a high chance of misuse  

What Is First In First Out (FIFO) Method ?

FIFO (First In First Out) is a method of inventory valuation in which first batch of materials (oldest stock) are issued or sold first and new lot (latest purchase) remains in the stock. This method is just opposite of LIFO (last in first out) method. In this method, value of the closing stock is determined on the basis of latest purchase price.

Benefits Or Advantages Of First In First Out (FIFO) Method

The main advantages of FIFO method of inventory valuation can be pointed out as follows:

1. Simple And Easy Method

FIFO is simple to operate and easy to understand. It does not required special mathematical or accounting knowledge to understand this method.

2. Widely Used Technique

It is the most popular , widely used and GAAP approved method of inventory valuation. Big companies prefer this method because it provides more accurate result than other methods. 

3. Realistic Approach

FIFO is more realistic than LIFO method because in this method, value of stock represents the current market price.

4. Prevents Wastage And Obsolescence

In FIFO method, materials are issued on a chronological order, it means older items are sold first and newly purchased goods are stored. It helps to prevent wastage and obsolescence of materials.

5. Suitable For

It is suitable for perishable products having shorter life which cannot be stored for a long period.

6. No Manipulation Of Income

It is difficult to manipulate income like in LIFO because materials are sold at the old cost.

Drawbacks Or Disadvantages Of First In First Out (FIFO) Method

Major disadvantages Of FIFO can be pointed out as follows:

1. Overestimation Of Income

One of the main weak point of this system is that it overestimates income during inflation. It shows higher profit because of higher selling price and lower cost of production. 

2. High Tax Liability

When the price of the product rises, it shows more profit because of less production costs which leads to increase in the tax liability of the firm.

    Also Read:

Advantages And Disadvantages Of LIFO

Difference Between LIFO And FIFO

3. Cost Fluctuations

In this method, production costs fluctuate as per the fluctuations in the price of materials.

4. Difficult To Record

Because of frequent fluctuation in the price of materials, it is difficult to maintain record properly. It makes clerical work complex and increases the chance of errors.

5. Not Suitable

FIFO method is not appropriate if many lots of materials are acquired at different price in the same period.

Pros And Cons Of FIFO In Short

Pros:

- It is simple to maintain and easy to understand

- Provides more realistic results than LIFO

- It is most commonly used method

- It is approved By GAAP 

- It discourages the manipulation of figures

Cons:

- It overestimates the income of the firm

- It increases the tax liability 

- High chance of clerical errors

- It understates the cost of production

- Matching of current costs and current revenue is not possible

What Is Last In First Out (LIFO) Method ?

Inventory valuation method in which most recently purchased, acquired or produced materials are issued or sold first is called last in first out (LIFO) method. In this method of recording inventory, last batch of materials are issued first and previous batch remains on the stock. In LIFO, value of closing stock is determined on the basis of previous price which is generally lower than the latest price.

Benefits Of Advantages Of LIFO Method

The main advantages of LIFO method of recording inventory can be highlighted as follows:

1. Tax Advantage

This method shows higher cost of good sold because of the rising price of materials. Higher cost of goods sold lowers taxable liability of the company. So, firm can enjoy the benefit of tax reduction.

2. Better Measurement Of Cost

In LIFO, recent costs and current revenue are matched which prevents understating the cost of good sold and overstating of profit. 

3. Suitability

This method is appropriate when the price of the products is rising because it reduces taxable income and improves cash flow of the business.

4. Realistic Result

LIFO method shows more accurate and realistic result (profit or loss) than first in first out (FIFO) method of inventory. 

Drawbacks Or Disadvantages Of LIFO Method

Some of the major disadvantages Of LIFO are as follows:

1. Complex Method

Last in first out (LIFO) method is more complicated, complex and consumes more clerical work than FIFO. It is difficult to compare the cost of similar jobs because of the price variation.

2. Not Suitable

It is not suitable for perishable goods having very short life. Because they cannot be stored or preserved for long period.

3. Understatement Of Inventory

In this method, value of inventory is computed on the basis of oldest cost. So, it understatements the value of materials on the stock.

4. Manipulation Of Income

There exists a chance of income manipulation by changing purchase pattern.

    Also Read:

Advantages And Disadvantages Of FIFO

Difference Between LIFO And FIFO

5. Not Popular

LIFO is least preferred method of inventory. It is not popular and widely used like other methods because of its complications at the time of price fluctuation. 

Pros And Cons Of LIFO In Short

Pros:

- It provides tax benefit

- It shows more realistic result

- It is appropriate when the prices of the products are rising

- It discourages understating of cost of good sold 

Cons:

- It is more complicated than other methods

- It is not suitable for perishable goods

- Possibility of manipulation of income

- It is not preferred by tax authorities

- It understates the value of stock