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
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