Unit 7: Sources of Business Finance
1. Concept & Importance
Business Finance is the Lifeblood of any enterprise. It refers to the money required for carrying out business activities.
💡 Mnemonic for Importance: "F-A-S-T"
- Fixed Capital: Buying land, buildings, machinery.
- Assets Acquisition: Expanding the scale of operations.
- Smooth Operations: Meeting day-to-day expenses.
- Technology Upgrade: Staying ahead of competition.
2. Owners' Funds (Internal Sources)
Funds provided by the owners/partners. These stay in the business for a long time and carry No Obligation to return at a fixed time.
⭐ The "E-P-R" Trio:
- Equity Shares: Real owners; get voting rights; Residual Income.
- Preference Shares: Priority in dividends and repayment of capital.
- Retained Earnings: Ploughing back of profits; zero cost of floatation.
3. Borrowed Funds (External Sources)
Funds raised through loans or credit. It creates a Fixed Financial Burden (Interest).
🎸 The Borrowing Song: "L-D-P-T-I"
"Loans from banks for the short-term play,
Debentures keep the fixed interest at bay,
Public deposits from the crowd so wide,
Trade credit keeps the stock inside,
ICD between firms is a quick-fix ride!"
- Debentures/Bonds: Fixed interest; no voting rights.
- Loans: From Commercial Banks or Financial Institutions.
- Public Deposits: Invited directly from the public.
- Trade Credit: Credit from suppliers of goods.
- ICD: Unsecured loan from one company to another.
4. Comparison: Owners vs. Borrowed
| Basis | Owners' Funds | Borrowed Funds |
|---|---|---|
| Nature | Permanent Capital | Temporary/Fixed Period |
| Risk | Primary Risk Bearers | No Risk (Lenders) |
| Control | Full Control (Voting) | No Control over Management |
| Security | No security required | Often requires Collateral |
| Reward | Profits (Dividends) | Fixed Interest |
Remember: Debt is a double-edged sword. Use it wisely!
SUCCESS MINDSET: LEARN. APPLY. GROW. 🚀
No comments:
Post a Comment