UNIT -5
METHODS OF RAISING FINANCE
5.2 NEED FOR AND IMPORTANCE OF FINANCE :-
→ Every busiess activity requires money to run it.
→ A business, besided, finance, we require man, mateials, machinery and management.
→ But finance may be regarded as the most important requirement of busineess.
→ Men, materials, machinery and managers can be broght together and engaged in business when you have adequate finance.
→ The important of finance has increased in modern times for two reasons.
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(1) The business activites are now undertaken on a much larger scale than in the part.
(2) The manufacturing process has become more complex than in the part.
5.3 TYPES OF FINANCIAL NEEDS :-
→ There are two ways of classifying the financial needs of the busiess.
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(1) On the basis of the extent of performance, we can classify the financial needs into :-
(a) Fixed Capital :-
→ Fixed capitals are long-term captial.
→ Example- Land, Buildings, Machinery, furniture etc.
(b) Working Capital :-
→ Money invested in current assets like stock of raw materials, salary, rent, fuel, electricity and water, repairs and maintenance of machinery, advertising etc is known as workign captial.
(2) On the basis of the period of use, we can classify the financial needs into :-
(a) Long-term Capital :-
→ Required for a longer period, (five years or more).
(b) Short-term Capital :-
→ Required for a short period, (less than a year).
5.4 CAPITAL STRUCTURE :-
→ The funds raised to meet both the long-term and shor-term capital requirements may take the form of ownership capital or borrwoed capital.
• Ownership Capital :-
→ The amount of capital invested in a business by its owners in known as ownerships capital.
• Borrowed Capital :-
→ We can borrow capital for a our business by taking loan from bank or other resources.
• What is Capital Structure? :-
→ Proportion in which different sources of long-term fincance are used to meet the tatal funds requirements, like shares, debentures, loans, retained profits, etc.
• Factors Determining The capital structure :-
(1) Nature of the business.
(2) Characteristics of the company.
(3) Management control.
(4) Cost of finance.
(5) Effect of dept fincancign on the earnings pre equity shares.
(6) Expected earning in relation ot interest chares.
(7) Availability of cash (cash flow).
(8) Flexibility of capital structure.
5.5 METHODS OF RAISING CAPITAL :-
→ For sole proprietro, there are limited apportunities for raising funds like :-
(1) Investment of own savings.
(2) Raising loans from frieds and relatives
(3) Arranging advances from commerical banks.
(4) Borrowing from finance companies.
→ In the case of company :-
(1) Issue of shares.
(2) Issure of debentures.
(3) Loans from financaial institutions.
(4) Loans from commercial banks
(5) Public deposits
(6) Retention of profits
→ The folllwoing method are used to finance short-term capital :-
(1) Trade credit
(2) Factoring
(3) Discounting bills of exchange
(4) Bank overdraft and cash credit
(5) Public deposits.
