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Finance assignment help
Money required for carrying out business activities is called finance. Finance is needed to: Establish a business To run a business To modernize , expand and diversify the activities of
business. For buying the assets; they may be tangible like
machinery, factories, building etc. or intangible such as trademark, patent etc.
For running day- to day operations such as buying raw materials, paying wages, salaries etc.
Finance
SOURCES OF FINANCEON THE BASIS OF PERIODCLASSIFICATION
Long term finance Medium term finance Short term finance
Types of business finance on the basis of period:
Funds which are required to be invested in a business for a long period of time, that is more than five years are known as long term finance. FEATURES OF LONG TERM FINANCE Used for acquiring fixed assets like machinery, land,
building. It is required for expansion projects and adoption of
innovative techniquesMETHOD OF RAISING LONG TERM FUNDSIssue of shares, debentures and long term loans.REQUIRED BYLarge scale enterprises
Long term finance
It is the finance required by business enterprises for more than one year but less than five years is known as medium term finance.FEATURES OF MEDIUM TERM FINANCE Used for introduction of new products,
modernization of plant and machinery.METHOD OF RAISING MEDIUM TERM FINANCEAccepting public deposits, medium term loans etc.REQUIRED BYManufacturing industries
Medium term finance
It is the finance required for a short period upto one year is known as short term finance.FEATURES OF SHORT TERM FINANCE Used to meet day- to – day requirements such as
holding stock of raw materials, spare parts.METHOD OF RAISING SHORT TERM FINANCECredit granted in trade, short term loans from commercial banks, commercial paper, factoringREQUIRED BYTrading companies
Short term finance
Owner’s fund Borrowed fund
TYPES OF BUSINESS FINANCE ON THE BASIS OF OWNERSHIP:
It refers to the funds contributed by the owners as well as the accumulated profit of the company. For e.g.: equity shares, retained earningFEATURES:1. Source of permanent capital2. Provision of risk capital3. No security required
Owner’s fund
It refers to the borrowing of the firm. It includes all funds available by way of loans or credit.FEATURES1. Need to give security2. Regular payment of interest has to be
made.3. Holders do not get the right to control and
manage the activities of the firm.
Borrowed funds
Retained earning Trade credit Public deposits Commercial paper Shares Debentures Commercial bank Financial institution International financing
METHODS OF RAISING FINANCE
It refers to undistributed profits after payment of dividend and taxes. FEATURES:Cushion of securityFunds for new and innovative projectsMedium and long term finance providerConversion into ownership fundsNo costNo fixed liabilityNo security required
Retained earning
It refers to an arrangement where by a manufacturer is granted credit from the supplier of raw material, input, spare part etc. generally the duration is of 3- 6 months. It is short term financing facility.FEATURESReadily availableFlexibleNo floatation cost
Trade credit
It refers to unsecured deposits invited from the public.FEATURESNeed no security as raised from publicSimple procedure to raise fund for the
duration of six months to 3 years.Reduction in tax liabilityNo dilution of control
Public deposits
It is an unsecured promissory note issued by private and public sector companies with a fixed maturity period of 3 to 12 moths. These are generally issued by companies having a good reputation.FEATURESThese are freely negotiable instrumentsCost of issuing is very lowContinuous source of fundCompanies can also invest their money in
discounting the commercial paper.
Commercial paper
Share is the smallest unit in which owner’s capital of the company is divided. According to companies act, a public company can issue two types of shares:Equity sharesPreference shares
share
It is a common security issued under permanent or owner’s fund capital. Equity shareholders are called the real owners of the company.FEATURESPrimary risk bearers of the companyClaim over the left over income onlyEquity shareholders have the control over the
activities of the companyAt the time of high profit, shareholders enjoy
higher profit
Equity shares
These are those share which get preference over equity shares in respect to:The payment of dividendRepayment during winding upFEATURESFixed rate of dividendNo securityVoting powerHelp to collect large amount of funds
Preference shares
They are common securities of borrowed fund capital. It can be defined as ‘ a document or a certificate’ issued by a company under its seal as an acknowledgement of its debtFEATURESFixed rate of interestNo voting rightsSecurity requiredRedeemable i.e. can be redeemed or pay
back on expiry of fixed period
debentures
They provide funds for different purposes and different period. Generally commercial banks provide short and medium term loans.MERITSBank keep the information of borrower
confidentialNo formalities of issue of prospectusVery flexible source of loan
Commercial banks
They are leading institution or development banks that provide financial assistance and guidance to industries and business enterprises. FEATURESProvide medium and long term loanProvide financial as well as managerial adviceUnderwrite the public issue of shares and
debenturesProvide loan guarantee
Financial institutions
The main securities used by Indian companies to tap international source of finance are given below: Loans from commercial bank International agencies and development
banks International capital market1. GDR2. ADR3. FCB
International source of finance
It refers to efficient acquisition of finance, efficient utilization of finance and efficient distribution and disposal of surplus for smooth working of company. ORIt is mainly concerned with efficient acquision and allocation of funds.
Financial management
Objectives of financial management
Maximization of wealth of equity shareholder
PROFIT MAXIMISATION
MAINTENANCE OF LIQUIDITY
PROPER UTILISATION OF
FUNDS
MEETINGS OF FINANCIAL
COMMITMENTS
FINANCIAL DECISIONS:
INVESTMENT DECISIONa) Capital budgetingb) Working Capital
) FINANCING DECISIONa) Debtb) Equity
) DIVIDEND DECISIONa) Profitb) Retained earning
It means the proportion of debt and equity used for financing the operations of business
CAPITAL STRUCTURE= DEBT/ EQUITYCapital structure should be such that it increases the value of equity share as maximizes the wealth of equity shareholders
Capital structure
It refers to excess of current assets over current liabilities GROSS WORKING CAPITAL:
This refers to investment in all the current assets such as cash, prepaid expenses. NET WORKING CAPITAL
This refers to excess of current assets over current liabilities. It indicates the liquidity position of the company,
Working capital
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