Thursday, July 12, 2012

Class XI, Principles of Commerce, "Finance"

Introduction It is necessary for a businessman to plan financial aspect in the early stage of starting any new business and it should not be left to chance. From the starting and to any later expansion in the firm’s business, finance plays a very important role in purchasing aspects and to meet the expenses if necessary for carrying on the business affairs. The financial needs of business are assessed by the size and the nature of work. For a large business, financial needs are high as compared to a small business. For example, the joint stock companies require large amount of funds whereas sole proprietorship and the partnership business require small amount of funds. Finance can be obtained through two major resources owners’ capital and borrowed money. The requirements of funds depend upon utilization that is how much funds will be needed for circulating and fixed capital. The capital credit obtained from any financial institution is known as borrowed money. Funds which are required to purchase any asset and to meet the expenses from the initial stages to the extension of any business is known as finance.
Kinds of Finance
Long Term Finance
Long term finance is that part of capital which is required by a business enterprise to finance its blocked or fixed assets such as land buildings, machinery and other appliances of permanent nature. In the established undertakings, it is required for extending the scale production and for the renewal and replacement of the fixed assets, or for taking the advantages of new discoveries. Thus, it is needed for considerable period of time, usually for 10 or more years and hence it involves a high cost due to higher amount of interest.
The following are the various sources of obtaining long term finance.
The initial capital is obtained by a new concern by floating shares. Shares represent equal portion into which the capital of a company is divided. Shares may be issued directly by the company or through the under writers. Selling of shares is the most important method of securing fixed capital and the contributors are the general public.
To raise sufficient capital and to draw the attraction of those people who don’t find interest in investment, debentures are issued b y a company. Debenture is a promissory note for the repayment of money borrowed and the payment of interest at fixed rates. The contributor is again the general public.
The state aid in the form of guarantee of dividend of new companies, taking of securities, plays a definite role in the financing of industries. In our country, industrial-finance Corporation was established to give long term loans.
In Pakistan there are the following institutions from which different industries can take their finance for long periods:
This corporation aims at stimulating promotion of new industries, the expansion of the existing ones and the furnishing of the technical know-how as to increase production.
This bank was setup to provide credit and other facilities for the development of industries. Other institutions are NDFC, BEL, investment trusts, insurance companies and commercial banks.
An enterprise can raise finance by the acceptance of deposits from the public directly for fixed terms and at fixed rate of interest. This method is however, dangerous and has declined in importance in recent years.
This is very easy method of financing and is available to only Established of a part of the profits is an ideal means of financing, expansion and improvements.
Short Term Finance
A common problem of every business is financing day –to –day operations. Normally business finances these items out of the receipts from sales, but some times the firms financing is needed. It is required for pour hasting raw materials, additional inventory etc. for meeting purposes’ .it is required for short period ,generally foe one year .it is needs because of the fact that the stock is to kept ready before it is actually consumed.
Sources of Short Term Finance
The main sources of obtaining short–term loans are as following:
1. Commercial Bank
Finances are acquired from banks by means of loans, discounts overdrafts etc. they provide short term finance in the shape of discounting bills, granting loans and accepting bills on behalf of their customers.
2. Commercial Credit House
These institutions provide short term finance against mortgage of property or promissory notes.
3.Proprietor‘s Personals Funds
This is an important source of financing a small business. The proprietors themselves supply the capital of the business from their own pockets. But in large scale undertakings, this source is insufficient.
4. Borrowings from Friends and Relatives
Sometimes business is also finance by taking loans from friends and relatives. Finance from this source is very limited and uncertain.
5. Public Deposits
Some units accept deposits from the public from short period on attractive rates of interest and utilize the funds for their currents financial requirements.
6. Indigenous Bankers
There are large number of money lenders i.e. Mahajan, Sahukar, Shroff in the country who provide considerable sums for the business, though at a high rate of interest.
7. Land Mortgagment
The financial institutions give loans on short–terms to he business man or industrialists on the security of land and bearable.
8. Foreign Exchange Banks
These banks also provide short term funds. They mainly provide finance to the foreign business undertaking of their nationality.
9. Unsecured Loans
This type of financing includes:
A) Promissory Notes
They are the legal instruments used in advancing banks loans. It is the major source of the short–term finance.
B) Commercial Drafts
A draft is an instruments made by one person ordering the second person to pay a sun of money to a specified individual on sight or at a future date. Secured loans: There are times when short term financing may be accompanied by collaterals, which gives the lender the right to seize certain property if the borrower does not replay the loan.
10. Secured Loans
There are times when short term financing may be accompanied by collaterals, which gives the lender the right to seize certain property if the borrower does not repay the load.

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