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SOURCES OF BUSINESS FINANCE
Form and the importance of Finance :
We have seen services provided to the fields of trade, industry and commerce and forms of business enterprises in the previous chapters but for all these, establishment of unit and starting of activities are required. The predetermined aims of unit can be achieved only by doing these. Finance is (required to undertake many activities of unit.
Finance is required by the business unit mainly to undertake the following expenses:
(1) For the purchase of land, building, office, shop, warehouse, etc.
(2) For the construction of the factory
(3) For the purchase of machine, materials and raw materials
(4) For the purchase of furniture
(5) For procuring commercial services
(6) For purchasing the stationery
(7) For the payment of salaries and wages to employees
(8) For daily expenses
(9) For the modernization and expansion of business unit
(10) It is very essential to provide for provision of finance for contingencies.
Besides production has taken place on a large scale due to scientific research and innovations After the industrial revolution. due to large-scale production, spread of trade, commerce and industries have increased. So, finance was necessitated on large scale.
Form of finance :
Meaning : Business finance is a tool to pay the debt. The business and businessman are separate. This distinction is vividly seen in the company form. The business spends and makes debt for the abovementioned activities. It procures finance as a tool like other tools for their payments. Finance is procured according to the short-term or long-term debts.
Business can achieve its goals effectively and can fulfill its concerned financial responsibility with finance. Many activities are connected with finance. The necessity of finance is inevitable for savings, payments, giving and getting credits, etc. Finance is the tool for completing business activities and plans. The role of finance is like a barometer to measure the economic condition of a business. Finance is an important tool for the management of economic activities. Finance is a universally’ accepted tool for exchange. Besides, it can be said with reference to the form of finance, that finance is always having alternative uses. As seen earlier, the receipts and payments are inherent in various business transactions. Finance required for the purchase of fixed assets of business is known as fixed capital. e.g. Purchase of land, machineries, building, office and shop. Finance is required for daily expenses also. This capital is known as working capital. It can be said in short that finance can be identified as a motivating force to run the business smoothly and to undertake various transactions.
Moreover, finance cannot be separated from its other activities. Procurement of finance is a special function and it is closely connected with economics, accounting system and administration, etc.
Importance of business finance : It can be said that as blood circulation system is necessary for the human body, in the same way, for running any unit, for satisfying its short-term and long-term financial necessities and for maintaining the financial soundness of the unit right finance system (receipt-payment) is inevitable. The transactions of unit are not possible without finance as human life is not possible without blood. Besides, the quantum of finance is always limited and it has alternative uses, so it should be used carefully, efficiently and optimally.
The interrelation of stages for starting a business unit and the importance of finance can understood from the following chart :
Determining the objects of business unit
Selecting activities according to objectives
Selecting the form of business enterprise according to activities
Determining the estimates (and duration of necessities) of financial requirement with reference to business enterprise and activities.
It may happen that due to the scarcity of finance, payment can be delayed or cannot be made. The prestige of business unit will be at stake in this situation. If the cheque is dishonored, due to inadequate balance in bank account, legal action can also be taken against the person or the institute which gives cheque. This will tarnish the image of the unit in the market.
If this situation goes on repeating, the person or the institute will lose faith of employees, the suppliers of materials, the investors, the and other classes of society.
Sometimes, the investors and the creditors bring pressure on the managers for getting their money back immediately. It may not be possible for the managers to pay immediately as that money is blocked in business. Consequently, business unit faces, financial crisis.
Due to the paucity of finance, sometimes, bright chances of investment might be lost.
The managers must have knowledge, skill, deep understanding and intelligence to ease the above-mentioned situation and to solve the problems especially in the present situation of global competition.
Types of business finance and its uses
Business finance is of following types with reference to time-period :
(1) Long Term finance (2) Medium term finance (3) Short-term finance.
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| Types of Business finance |
Notes : (1) The long term finance sources can be used for medium-term and short-term also.
(2) Sources contained in syllabus have only mentioned here.
(3) Finance received for business in known as capital and fund also.
(1) Long-term finance : A business unit has the necessity of business finance for different time periods. Some of the finance is required for certain purposes permanently, or for more than 10 years. The purpose of this type of finance is for the purchase of land, building, machineries and other fixed assets and for the expansion and modernization of unit or for the purchase of modern machineries and technology or for the purchase of new industrial unit. Finance invested in this way is known as long-term finance.
Uses :
(1) Long-term finance is useful to become self-reliant in activities like production.
(2) Long-term finance is useful for reducing cost by undertaking large-scale economic activities and to sustain the competition.
(3) Risk is very high in the gigantic capital investment plans. So, the element of competition is low and profitability element is high. For this reason only, long-term finance is deadly required for these high profitable plans.
(4) In the long-term the investment in fixed assets can be recovered in the form of income. For this long-term finance-becomes helpful.
Sources of long-term
Following sources can be utilised for procuring this type of business finance :
Equity share, Preference share, Debenture Ploughing back of profit, long-term loan, depreciation fund and other funds, etc.
(2) Medium-term finance : Generally, requirements of finance for the time-period of more than 5 years but less than 10 years are termed as medium-term finance. For the production and marketing management expenditure of unit and for the purchase and maintenance of tools, etc. medium-term finance is required.
Uses
(1) The purpose of this type of finance is necessary for salaries, wages, administrative expenses, transportation facilities, etc.
(2) Economic gains can be earned by utilising medium-term finance for the purchase of right or more quantity of materials.
(3) This type of finance is useful for tools, for the formation of security system and for research.
Sources of medium-term finance
Preference share, debenture, public deposit, bank loan, special type of loans from industrial financial institutes, etc. are included into the sources of medium-term finance.
(3) Short-term finance : Short-term finance includes financial requirements from 1 up to 5 years and sometimes even financial requirements of less than one year, that means of certain mont
Uses
(1) This finance is even used for unexpected or accidental requirements of those circumstances for which no provision has been made.
(2) Sometimes receipts are not as per calculations, so for the payment of expenses short-term finance is useful.
(3) Short-term finance is proved to be useful when depositors apply for the refund before due date.
(4) Short-term finance is useful for taking advantage of short-term business chances. This finance is useful for bidding for tender, for doing job-work or for supplying goods according to the conditions laid down in export order.
Sources of short-term finance
This finance can be procured through trade credit, cash-credit, public deposits of short duration, bank overdraft, private lending persons or firms by proper planning of cash, and sometimes by economizing in expenses at various levels.
Classification of sources of finance from ownership point of view can be made as below :
(1) Owner’s Funds
(2) Borrowed Funds
(1) Owner’s Funds : When the owners of the unit invest their own capital in business, it is, known as owner’s funds. Generally, for managing the long-term and medium-term requirements owner’s funds are used.
Following sources of owner’s funds are included
(1) Share capital/owners’ capital investment
(2) Ploughing back of profit
(3) Fund created by the provision of depreciation
(4) Reserves and other funds.
(2) Borrowed Funds : When the unit gets finance by creating debt, it is known as borrowed funds. Generally, for managing medium-term and short-term requirements, borrowed funds are collected. Finance is procured through those sources which are suitable for various time-period for which expenses are also to be made and each source has its own cost.
Following sources of borrowed funds are included
(1) Debenture / Bond (2) Long-term loan from financial institutes (3) Loan from industrial banks (4) Loan from banks (5) Cash credit (6).Bank overdraft (7) Public deposits (8) Private lending institutes / persons.
International sources can also be included in owner’s and borrowed funds. We shall study some of the sources of finance in the following chapter.
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