Wednesday 3 April 2019


FUNDS

It costs money to make money!
The backbone of any business is finance. To survive in this competitive world every business needs adequate finance to meet all its requirements. In olden times finance is needed either for acquiring capital assets i.e. to purchase furniture or for the creation of a new office /factory etc or for manufacturing of a new product. . Usually, such manufacturing are funded by internal sources, while funds required to purchase fixed assets are arranged from external sources. But, in today’s scenario the requirement of finance has been changed.  Today , we not only require finance to buy machinery or to develop a new product or to construct the building but finance is also required to buy materials or stock (the goods that are to be sold), to Carry out some market research and do other types of marketing or  to move into new markets etc. The funding of any project/trade is the most basic feature of its management. If the business is able to fund its project in the right manner, then the business will grow in the healthy manner with more cash inflows and more profit. The requirement of funds can emerge at any point of developing business. Funds are required at the time of startups and even at the time of expansion. Therefore, we can say that finance is needed throughout a company's life.
1.CLASSIFICATION OF THE SOURCES OF FINANCE
The funds for the business can be raised by various ways. The kind of business plays an important role in deciding the type of funds required. The big organization will be requiring a large amount of funds as compare with the smaller organizations. Smaller organizations can even use their retained earnings i.e business can be funded with the help of internal funds only. Smaller organization require less amount so they can even borrow from their friends and family members where as the bigger organization require a huge amount of finance so they can go for a bank loan, borrow funds from the financial institutions or even borrow from the general public by issuing shares and debentures.
Some of the sources of finance are shown in Figure 1

                                                                                       Figure 1
The sources of financial requirement of business can be classified as:
Ø  1.1Internal source of finance.
Ø  1.2 External source of finance.
Internal Source of Finance:  It is referred to the money which is raised from inside the business. It includes
Ø  Sales of assets: Sale of assets means selling of business assets to generate funds for the business which have either become old or have become obsolete( not in use for operational purposes)
Ø  Retained profits: Retained earnings are that part of the profit which is earnerd every year but not distributed to the shareholders. It is also known as reserves or ploughed back profits. In the long run such amount can used for funding the business.
Ø  Reduction in working capital: Reduction in working capital means reducing the level of inventory so that some additional cash can be raised for business.
External Source of Finance: It is referred to the money which is raised from outside the business. It includes:
Ø  Long Term Source of Finance
Ø  Medium Term Source of Finance


Dr. Himani GuptaAssociate  ProfessorDepartment of Management Studies 

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