Industrial Economics and Management, Schemes and Mind Maps of Industrial economy

Download Industrial Economics and Management and more Schemes and Mind Maps Industrial economy in PDF only on Docsity! Industrial (Business) Finance Introduction: Finance • Finance – to meet all our requirements in the economic world. • Finance is defined as the provision of money at the time when it is required. • It may be defined as the art and science of managing money. • Finance function is the procurement of funds and their effective utilisation in business. • All business decisions have financial implications and therefore financial management is inevitably related with every aspect of business operations. Working capital requirements • Funds required for day-to-day operations of an enterprise are known as working capital. • It is used for holding current assets such as stock of material, bills receivables and for meeting current expenses like salaries, wages, taxes, and rent. • The amount of working capital required varies from one business concern to another depending on various factors. – For example, A business unit selling goods on credit, or having a slow sales turnover, would require more working capital as compared to a concern selling its goods and services on cash basis or having a speedier turnover. Types of Finance Finance | Individual Business Classification: Sources of Funds On the basis of period Long-term Short-term m Equity shares m Trade credit @ Retained earnings Factoring @ Preference shares mw Banks @ Debentures @ Loan from financial institutions. @ Loan from banks paper Medium-term @ Loan from banks @ Public deposits @ Loan from financial Institutions @ Lease financing Source of Funds Classification = Commercial ft On the basis of On the basis of ownership source of ee Owner's Borrowed Funds Internal External Funds @ Debentures Sources Sources @ Equity @ Loans from banks g Equity @ Financial shares @ Loans from financial share institutions @ Retained institutions capital @ Loan from earnings m Public deposits & Retained banks = Lease financing earnings 4 Preference @ Commercial shares Papers @ Public deposits @ Debenture @ Lease financing @ Commercial papers m@ Trade credit @ Factoring Borrowed funds • ‘Borrowed funds’ refer to the funds raised through loans or borrowings. • Borrowed funds include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits and trade credit. • Such sources provide funds for a specified period, on certain terms and conditions and have to be repaid after the expiry of that period. • A fixed rate of interest is paid by the borrowers on such funds. • Generally, borrowed funds are provided on the security of some fixed assets. Basis of Generation Internal sources • Funds that are generated from within the business is called internal source. – For example, A business can generate funds internally by accelerating collection of receivables, disposing of surplus inventories and ploughing back its profit. • The internal sources of funds can fulfil only limited needs of the business. External sources • External sources of funds include those sources that lie outside an organisation, such as suppliers, lenders, and investors. • When large amount of money is required to be raised, it is generally done through the use of external sources. • External funds may be costly as compared to those raised through internal sources. • In some cases, business is required to mortgage its assets as security while obtaining funds from external sources. • Issue of debentures, borrowing from commercial banks and financial institutions and accepting public deposits. Limitations • Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends. • It is an uncertain source of funds as the profits of business are fluctuating. • The opportunity cost associated with these funds is not recognised by many firms. This may lead to sub-optimal use of the funds. Trade credit • The credit extended by one trader to another for purchasing goods or services is known as trade credit. • Trade credit facilitates the purchase of supplies on credit. Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’. • It is commonly used by business organisations as a source of short-term financing. • It is granted to those customers who have reasonable amount of financial standing and goodwill. • Terms of trade credit may vary from one industry to another and from one person to another. Merits • Trade credit is a convenient and continuous source of funds. • Readily available in case the credit worthiness of the customers is known to the seller. • It needs to promote the sales of an organisation. • If an organisation wants to increase its inventory level in order to meet expected rise in the sales volume in the near future, it may use trade credit to, finance the same. • It does not create any charge on the assets of the firm while providing funds. b. Providing information about credit worthiness of prospective client’s • Factor have large amount of information about the trading histories of the firms. – This can be valuable to those who are using factoring services and can thereby avoid doing business with customers having poor payment record. • Factors may also offer relevant consultancy services in the areas of finance, marketing, etc. Merits • Obtaining funds through factoring is cheaper than other sources of financing such as bank credit. • With cash flow accelerated by factoring, the client is able to meet his/her liabilities promptly as and when these arise. • It is flexible and ensures a definite pattern of cash inflows from credit sales. • It provides security for a debt that a firm might otherwise be unable to obtain. • It does not create any charge on the assets of the firm. • The client can concentrate on other functional areas of business as the responsibility of credit control is shouldered by the factor. Limitations • This source is expensive when the invoices are numerous and smaller in value of amount. • The advance finance provided by the factor firm is generally available at a higher interest cost than the usual rate of interest. • The factor is a third party to the customer who may not feel comfortable while dealing with it. Limitations • A lease arrangement may impose certain restrictions on the use of assets. For example, it may not allow the lessee to make any alteration or modification in the asset. • The normal business operations may be affected in case the lease is not renewed. • It may result in higher payout obligation in case the equipment is not found useful and the lessee opts for premature termination of the lease agreement; and • The lessee never becomes the owner of the asset. It deprives him of the residual value of the asset Public deposits • A company can raise funds by inviting the public to deposit their savings with their company. • Pubic deposits may take care of both long and medium-term financial requirements of business. • Public deposits are beneficial to both Depositors as well as to the Organisation. • Because Depositors get higher interest rate than that offered by banks and the cost of borrowing (through deposits) to the company is less than the cost of borrowings from banks. • The acceptance of public deposits is regulated by the Reserve Bank of India. Merits • The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement. • Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions. • Public deposits do not usually create any charge on the assets of the company. The assets can be used as security for raising loans from other sources. • As the depositors do not have voting rights, the control of the company is not diluted. Merits • Since commercial paper is sold on an unsecured basis it does not contain any restrictive conditions. • As it is a freely transferable instrument, it has high liquidity. • It provides more funds compared to other sources. • Generally, the cost of CP to the issuing firm is lower than the cost of commercial bank loans. • A commercial paper provides a continuous source of funds. This is because their maturity can be tailored to suit the requirements of the issuing firm. Further, maturing commercial paper can be repaid by selling new commercial paper. • Companies can park their excess funds in commercial paper thereby earning some good return on the same. Issue of shares •The capital obtained by issue of shares is known as share capital. •The capital of a company is divided into small units called shares. •Each share has its nominal value. –For example, a company can issue 1,00,000 shares of Rs. 10 each for a total value of Rs. 10,00,000. The person holding the share is known as shareholder. •There are two types of shares normally issued by a company. –Equity shares: The money raised by issue of equity shares is called equity share capital –Preference shares: The money raised by issue of preference shares is called preference share capital. Equity Shares •It is the most important source of raising long term capital by a company. •It represents the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. •Equity shareholders do not get a fixed dividend but are paid on the basis of earnings by the company. •They are referred to as ‘residual owners’ since they receive what is left after all other claims on the company’s income and assets have been settled. •They enjoy the reward as well as bear the risk of ownership. •Their liability is limited to the extent of capital contributed by them in the company. •They have a right to participate in the management of the company by voting .