Chapter 8: Sources of Business Finance

Business Financing Concepts

• Term for Funds for Fixed Assets: Capital expenditure refers to the funds required for purchasing fixed assets such as land, buildings, and machinery.
• Non-Long-Term Fund Classification: Short-term loans and credit lines are NOT classified as long-term sources of funds.
• Purpose of Working Capital: Working capital is essential for maintaining daily operations and meeting short-term financial obligations.
• Definition of Finance in Business: Finance in a business context involves the management of money and investments for operational and strategic purposes.

Investment and Capital

• Higher Investment Activities: Manufacturing activities typically require higher investment in fixed assets, necessitating substantial financing.
• Medium-Term Fund Classifications: Sources like short-term loans are NOT considered medium-term sources of funds.
• Owner’s Funds Components: Owner’s funds generally include equity capital, retained earnings, and profits reinvested into the business.
• Internal Sources of Funds: Internal sources consist of retained earnings, depreciation reserves, and other profits generated within the organization.

Fund Duration and Types

• Long-Term Funds: Long-term sources of funds are invested in the business for extended durations and are not required to be repaid during the business's lifetime.
• Definition of Retained Earnings: Retained earnings refer to the portion of net income kept within the company instead of being distributed to shareholders.
• Types of Business Capital Requirements: Different capital requirements for a business include working capital, fixed capital, and contingency capital.

Financial Needs and Growth

• Financial Needs for Diversification: To diversify business operations, funds are necessary for research, development, marketing, and new product lines.
• Finance for Technology Upgradation: Finance is crucial for technology upgrades to improve efficiency, enhance productivity, and maintain competitive advantage.
• Impact of Business Growth on Financial Needs: Higher growth leads to increased financial requirements for scaling operations, hiring, and expanding infrastructure.

Classifications and Sources of Funds

• Sources of Funds Classifications: Funds can be classified based on the duration into short-term, medium-term, and long-term sources.
• Medium-Term Funds Sources: Examples include term loans, leasing agreements, and debentures used for capital purchases.
• Internal vs. External Sources of Funds: Internal sources are generated within the business, while external sources are obtained from outside entities such as banks, investors, or financial markets.
• Short-Term Sources of Funds: Examples include bank overdrafts, trade credit, and short-term loans.
• Main Purpose of Retained Earnings: Retained earnings are primarily used for reinvestment in business operations, supporting growth, and funding capital expenditures.