Sources of business finance

SOURCES OF BUSINESS FINANACE CLASS 11TH

1. SOURCES OF BUSINESS FINANCE

2. What is business finance ? Business finance refers to the money required for carrying out business activities. It is basically concerned with acquisition of funds, and distribution of profits by business enterprise.

3. NEED FOR BUSINESS FINANCE Almost all business activities require some finance. Finance is needed :- To start and establish a business To run day to day activities like payment for raw material , salaries, etc. To modernize ,expand and diversify the business To purchase assets.

4. Classification of Financial needs of business Fixed capital Requirements :- A business needs various fixed assets like land, building, plant etc to carry on its business activities. “ Fixed capital is the money invested in fixed assets .” Fixed capital remains invested in the business for a long period of time. Working capital requirements :- In addition to investment in fixed assets, every business needs funds for its day to day activities . Working capital refers to that part of total capital, which is required for holding current assets, such as stock bills receivables etc.

5. CLASSIFICATION OF SOURCES OF FUNDS Period basis Ownership basis Source of generation basis

6. PERIOD BASIS Long term sources :- it includes all those sources which are required by the business firms for a period exceeding 5 years . Medium term sources :- it includes all those sources which are required by the business firms for a period more than one year, but less than 5 years. Short term sources :- it includes all those sources which are required by the business firms for a period not exceeding 1 year.

7. OWNERSHIP BASIS Owner`s fund:- the funds provided by the owner of the business enterprise are known as owner`s funds. For ex:- funds or capital provided by sole trader or partners or shareholders of company. Borrowed funds:- the funds raised through loans or borrowings, are known as borrowed funds. For ex:- loans from commercial banks , loans from financial statements etc .

8. Sources of generation basis Internal sources :- it includes all those sources which are generated from within the business. for ex :- retained earnings , funds from disposal of surplus inventory, etc. External sources :- it includes all those sources that lie outside an organization. For example :- issue of debentures, borrowing from commercial banks and financial institutions and public deposits.

9. Owner`s Fund Owners funds are the funds provided by the owner of the business enterprise. The various sources of owners fund are :- Equity shares Preference shares Retained earnings

10. Equity shares Equity shares are the most important source of raising long term capital by a company. Equity shares are those shares which do not carry any special or preferential rights in respect of payment of annual dividend and repayment of capital The money raised by the issue of equity shares is termed as “ Equity share capital ”.

11. Features of Equity Shares The equity shareholders are the primary risk bearers. Equity shares provide permanent capital to the capital to the company and cannot be redeemed during the life time of the company. The return earned by the equity shareholders is known as ‘ dividend ’ which varies with the earnings of the company.

12. Preference shares Preference shares are those shares, which enjoy certain priorities regarding the payment of dividend at a fixed rate and return of the investment (capital). The capital raised by issue of preference shares is called ‘ preference share capital ’.

13. The preference shareholders enjoy two preferential rights over equity shareholders: 1. “Right to receive fixed rate of dividend before any dividend is paid to equity shareholders.” 2. “Right to receive repayment of capital on winding up of the company, before the capital of equity shareholders is returned.”

14. Features of preference shares Fixed rate of dividend :- Preference shareholders receive dividend at a fixed rate before any dividend is paid to equity shareholders. Repayment of capital :- preference shareholders have preferential right as to the redemption of capital at the time of winding up company. No voting rights :-Preference shareholders generally do not enjoy any voting rights.

15. Types of preference shares Cumulative preference shares Non cumulative preference shares Participating preference shares Non participating preference shares Convertible preference shares Non-Convertible preference shares

16. Retained Earnings The earnings of a company are not distributed among the shareholders . A reasonable part of it is retained as reserves or surplus. Retained earnings refer to that part of profits which is kept as reserve for use in the future. OR “ Ploughing back of profit ”.

17. More about Retained Earnings It is also known as ‘ Internal Financing ’ ‘ self financing ’ OR “ ploughing back of profit ”. Retained earnings are the shareholders funds and there is no external liability i.e. company is under no pressure to pay back this amount. Retained earnings cannot be used by a newly established company and it has to rely on external sources of finance.

18. Borrowed funds Borrowed funds are the funds raised through loans or borrowings. Various sources of borrowed funds are :- Debentures and bonds Loans from financial institutions Loans from commercial banks Public deposits

19. Debentures and bonds . According to section 2(30) of the companies act 2013, “ Debentures includes stock , bonds or any other instrument of company evidencing a debt, whether constituting a charge on the assets of the company or not ”. LOANS FROM FINANCIAL INSTITUTION The central and state gov. have established various financial institutions in the country to provide finance to business organizations . These institutions are also known as ‘ development banks ’ as they aim at promoting industrial development of a country.

20. Loans from commercial banks Commercial banks are an important sources of raising funds for different purposes as well as for different time periods. Commercial bank is an institution which performs the functions of accepting deposits, granting loans and making investments, with the aim of earning profits . PUBLIC DEPOSITS “Public deposits are the deposits raised by the organizations directly from the public” . Under this method, companies inviting public deposits are required to advertise publicly along with its financial position.