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CHAPTER 7
CONCEPT OF BUSINESS FINANCE
The term finance means money or fund. The requirements of
funds by business to carry out its various activities is called
business finance.
Finance is needed at every stage in the life of a business.
A business can not function unless adequate funds are made
available to it.
NEED OF BUSINESS FINANCE
1. Fixed Capital Requirement :- In order to start a business, funds
are needed to purchase fixed assets like land and building,
plant and machinery. A trading concern needs lower investment
in fixed assets as compared to a manufacturing organisation
since it does not require to purchase plant and machinery, etc.
Similarly, a large-scale enterprise generally requires greater
fixed capital than a small scale enterprises.
2. Working Capital Requirement :- A business unit selling goods
on credit, or having a slow sales turnover, for example, would
require more working capital as compared to a concern selling
its goods and services on cash basis of having a speedier
turnover.
3. Diversification :- A company needs more funds to diversify its
operation to become a multi-product company e.g. ITC.
4. Technology upgradation :- Finance is needed to adopt modern
technology. For example, use of computers in business.
5. Growth and expansion :- Higher growth of a business
enterprise requires higher investment in fixed assets. So finance
is needed for growth and expansion.
Q.1 State two factors that affect the 'Fixed capital' requirements of a
company.
Q.2 Mention two types of financial needs of the business.
Q.3 Name the capital invested in fixed assets.
122 XI – Business Studies
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, Q.4 Name the funds needed for day-to-day operations of business.
Q.5 Aarav Ltd. sells goods on credit while Ananya Ltd. sells goods on
cash basis-which company will require more working capital.
Q.6 Which concern - a trading concern or a manufacturing concern
will have large amount of fixed capital. Why?
CLASSIFICATION OF SOURCE OF FUNDS
Source of Funds
Classification
On the basis of On the basis of On the basis of
Period Ownership Source of generation
Long Term Short-Term Owner's Funds Borrowed Funds Internal Sources External Sources
* Equity Shares * Trade Credit * Equity shares Sources * Equity Shares * Financial Institutional
* Retained Earnings * Factoring * Retained shares * Debentures Capital * Loan form Banks
* Preference shares * Bank * Loan from bank * Retained earning * Preference Shares
* Debentures * Commercial * Loan from * Public Deposits
* Loan for Financial Paper financial * Debentures
Institutions Institutions * Lease financing
* Loan from Banks * Public deposits * Commercial Papers
* Lease Financing * Trade credit
Medium-Term * Commercial * Factoring
* Loan from banks Paper
* Public Deposits
* Loan from financial Institutions
* Lease financing
METHODS OF RAISING FINANCE :-
Issue of Share :- The capital obtained by issue of shares is
known as share capital. The capital of a company is divided into small
units called share. If a company issues 10,000 shares of `10/- each
then the share capital of company is `1,00,000. The person holding the
share is known as shareholder. There are two types of share (I) Equity
share (II) preference share.
(a) Equity Share :- Equity shares represent the ownership of a
company. They have right to vote and right to participate in
the management.
123 XI – Business Studies
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, ADVANTAGES/MERITS :-
1. Permanent Capital :- Equity share capital is important source of
finance for a long term.
2. No charge on assets :- For raising funds by issue of equity
shares a company does not need to mortgage its assets.
3. Higher returns :- Equity share holder get higher returns in the
years of high profits.
4. Control : They have right to vote and right to participate in the
management.
5. No burden on company :- Payment of equity dividend is not
compulsory
LIMITATIONS/DEMERITS
1. Risk :- Equity shareholder bear higher risk because payment of
equity dividend is not compulsory.
2. Higher Cost :- Cost of equity shares is greater than the cost of
preference share.
3. Delays :- Issue of Equity shares is time consuming.
4. Issue depends on Share Market Conditions :- Equity
Shareholders are the primary risk bearer therefore the demand
of equity shares is more in the boom time.
B. Preference Share - Preference shares are considered safer for
investment. (as compared to equity shares) They receive
dividend at a fixed rate. Preference shareholder are like
creditors. They have no voting right.
Types of preference shares. :-
1. Cumulative preference shares.
2. Non cumulative preference shares.
3. Participating preference shares.
4. Non participating preference shares.
5. Convertible preference shares
6. Non Convertible preference shares.
124 XI – Business Studies
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