Sources of Funds from different organization

Sources of funds for mba and bba

1. Sources of Finance Guide to Manage Your Money Better Prepared by Prof. Neha Soni

2. Agenda 01 Introduction 02 Types of Funds 03 Explanation 04 Creating a Budget 05 Adjusting & Optimizing

3. Introduction Finance is the money necessary to be raised for an enterprise. The requirement may be for short or long periods, which would determine the type and source of finance. Money can be raised for short, medium or long-term. Long-term finance is typically finance of maturities of over five years . Long-term finance is required for medium to long-term purposes to meet the cost of acquisition of fixed assets for diversification, expansion, modernization, as also, to meet permanent working capital requirements. There have been findings that firms grow faster and are more productive when more long-term finance is available to them. Government subsidies do not produce the same effect and in some cases are associated with less productivity and growth.

4. Types of Funds T he sources of finance can be in the national currency, which in India is the Indian Rupee. Since liberalization of the economy, finance can also be availed in India in foreign currency such as the US Dollar, British Pound and Euro etc. Lon g-term finance can be categorized into three broad groups depending on the sources of funds viz : a) own funds, b) borrowed funds, and c) others. Own funds – a) equity share capital, preference share capital, convertible preference share capital, reverse and retained earnings. Borrowed funds – convertible debentures, non convertible debentures, fixed deposits, term loans. Others – subsidies, factoring, venture capital, ADR / GDR / Bond Issues, Seed Capital

5. Retained Earnings These are the earnings of an entity and it includes surplus or net income or profit, for the current accounting year after distribution of dividends i.e. the amount available for carrying forward into the next accounting period. It also includes accumulated profits of past periods left uninvest in the business but not definitely allocated for any purpose. Retained earnings can be appropriated for contractual agreements requiring such appropriations provided it is permitted by the board of directors. Retained earnings are those earnings, that are kept as reserves in the form of various reserve accounts. They are shareholders' funds and are used for purposes of capital or revenue expenditure of the company. When they reach a level of accumulation, with due regard to taxation, they may be distributed as bonus shares, to the existing equity holders, in a certain ratio to their equity holdings. There is a general belief that dividend yield is the most important indicator of stock value. Nevertheless, companies can create value for shareholders with earnings that are not paid out as dividends. Retained earnings can be used for buying back shares, retiring debt or reinvesting for growth which can increase future earnings per share. If the return that the organization receives from its retained earnings matches that which can be achieved by the individual investor, the dividend payout will not matter. Retained earnings can finance only a part of investment programmers since they are generally insufficient to provide all the needed funds. Some companies do not pay dividends at all, because they wish to retain the funds for expansion. They do not think it necessary to formalize the retention of earnings by declaring a stock dividend and would argue that there were no advantages in issuing more shares, thereby imposing a burden on the management to maintain future earnings.

6. Equity Shares Capital Every company requires substantial working capital to keep their business smooth and running. Such capital proves effective at times when the company is faced with financial restrictions to keep its regular operations active. More than often, companies use their equity shares to raise the required capital known as equity share capital. Equity Share Capital Meaning – To understand equity share capital, individuals need to familiarise themselves with the meaning of equity shares. Equity shares or ordinary shares that represent ownership stake in a company. Shares sold by a company function as a source of investment for the company as well. Also, individuals who hold equity shares are said to hold fractional ownership of a company Why Company Issues Equity Shares?
A company tends to invite the general public to acquire its shares as a means to earn fractional ownership of the same. Through such ownership, shareholders are entitled to earn returns in the form of dividends..

7. Types of Equity Share Capital Authorized Share Capital This is the maximum amount of shares a company is allowed to issue. When starting out, companies not only are required to establish a base value for their shares, called the par value. They also need to set out the maximum amount of shares they can issue. This limits how much share capital they can raise. Subscribed Share Capital It comprises of The part of issued share capital, which the investors agree upon and accept. Issued Share Capital Savings is the portion of income set aside for future use, emergencies, or Issued Share Capital. Issued share capital is the total amount of shares a company has sold. Typically, issued shares are the same as outstanding shares, representing all shares in circulation. However, exceptions exist, such as when a company repurchases its shares specific financial goals. Right Share The shares that are issued to individuals after they have invested in equity shares are known as right shares. They are issued to safeguard existing investors ownership.

8. Types of Shares Sweat Equity Shares As an Appreciation for a job company reward their employees and directors with shares. Such shares are known as sweat equity shares Bonus share These shares are issued to the investor as a form of dividend Paid up capital It forms the part of a subscribed capital which the company invests in their business.

9. Pros & Cons of Equity Shares Capital Advantages: Voting Rights and Ownership Potential for High Returns Dividend Income Liquidity Diversification Disadvantages: Volatility No guaranteed returns No dividend guarantee Requires market knowledge Management Decisions

10. Preference Share Capital It is the capital raised by issuing of preference shares. Preference shares are so called, because they confer preferential rights to payment of dividend at a fixed rate and for repayment of capital at the time of winding up of a company. Because of the fixed rate of dividend, they share a feature with debt instruments.

11. Types of Preference Share Cumulative Non cumulative Non - Cumulative Preference Shares do not collect dividends in the form of arrears. In the case of these types of shares, the dividend pay-out takes place from the profits made by the company in the current year. So if a company does not make any profit in a single year, then the shareholders will not receive any dividends for that year. Also, they cannot claim dividends in any future profit or year. Convertible preference share Convertible preference shares are those shares that can be easily converted into equity shares. Non Convertible preference share Non-Convertible preference shares are those shares that cannot be converted into equity shares. Redeemable preference share Redeemable preference shares are those shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation. Dividends on preference shares are said to be cumulative when it accumulates year after year if it is not paid for any year i.e. Profits are insufficient to pay dividend at the full rate for the year. The unpaid dividends constitute a claim, which gets precedence over dividends on common shares. Therefore, dividends cannot be paid on common shares so long as there are arrears of dividend on preference shares.

12. Types of preference share - to be continued Non Redeemable Preference Share This particular share cannot be redeemed or repaid during the active lifetime of a company. To elaborate, shareholders will have to wait until the company decides to wind up its current operations or liquidate the venture altogether to initiate the same. It makes the shares a perpetual liability for the company. Partcipating Preference Share The said shares extend the right to partake in surplus profit during liquidation once the company in question has paid its other shareholders. So, to elaborate, the participating preference shareholders receive a fixed rate of dividend and also have a share in the company’s extra earnings. Most individuals invest in participating preference shares of those companies which are more likely to generate robust profits. Non – Participating Preference Share As the name suggests, non-participating preference shareholders do not have a share in the extra earnings or surplus assets during the liquidation of a company. This type of share entitles its shareholders to receive only the pre-fixed dividends.

13. Retained Earnings Retained earnings are a part of the company's profits that have not been paid out as dividends. This money is put into a special ledger account until it is used for reinvesting in the company or paying future dividends. Understanding a company's retained earnings is important because it helps you know how much money is available for things like growing the business or buying new assets.

14. How to calculate Retained Earnings To calculate retained earnings, follow this formula: Retained earnings = Beginning retained earnings + Net income or loss - Dividends

15. Features of Retained Earnings Cushion of Security Retained earnings are considered as a cushion of security because they provide support in times of adversity when it becomes difficult for a firm to raise funds from other projects. Medium and Long term Finance Retained earnings are considered as ownership funds and serve the purpose of medium and long-term finance. Funds for Innovative Projects Retained earnings are a common source of funds for financing risky and innovative projects. These are generally used for research work, expansion projects, etc. Conversion into Ownership Securities Surplus retained earnings can be converted into ownership funds by way of issue of bonus shares. No cash outflow is involved in issuing bonus shares. Investors too are benefitted from the issue of shares free of cost.   . 

16. Advantages of Retained Earnings Most Dependable Source Being an internal source, retained earnings are a more dependable and permanent source of finance than external sources of funds. This is because all external sources depend upon market conditions, the preference of the creditors, etc. No Fixed Liability There is no fixed liability to pay dividends or interest on this  source of funds  as retained earnings are a company’s own money. No Explicit Costs Using retained earnings does not involve any costs to be incurred as no expenditure is to be made on issuing prospectus, advertising, floatation costs, etc. Goodwill Retained earnings add to the financial strength and credibility of the company. Large reserves enable businesses to respond with ease to any crisis or unforeseen contingency. Retained earnings may lead to an increase in the market price of the equity shares.  . 

17. Bonds

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19. Venture Capital Venture

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21. Reviewing Your Budget .

22. Thank You