Fed Flow of Funds â€“ Firms
Firms need funds to invest in short term assets such as working capital or longer term such as fixed capital. These investments are financed either by the means of borrowing or reinvested profits. In addition firms save to accumulate contingency reserves.
Factors that Cause Fed Flow of Funds to Change
Like household there are factors that cause the borrowing and lending of business to change such as â€“ economic conditions, taxes, availability of credit and technology. Lets briefly look at some of these factors
Economic conditions – The better the economic conditions the more firms will invest to increase the output to meet demand. In order to increase investments to produce more goods firms need to borrow more. In times of recession firms cut back on production, hence invest less in working capital and therefore borrow less.Â Â
Changes in investment tax credit makes investments more attractive for firms. This increases borrowing by firms.
Like households, availability of credit for firms and households make it easier for them to get access to credit, therefore causing a shift in the demand for credit.
As technology progresses firms invest more in technology and therefore needs to borrow for investments.
Next we study the impact of the Government sector on the sources and uses of funds.