The document discusses various types and sources of business finance classified based on period as short term, medium term, and long term finance and based on ownership as owner's funds and borrowed funds. It also explains key concepts in financial management like objectives, decisions around investment, financing, and dividends. Finally, it covers topics such as working capital, capital structure and provides additional resources for further information.

1. he l p
ssign ment
Fina nce a

2. Finance
Money required for carrying out business activities is
called finance.
Finance is needed to:
 Establish a business
 To run a business
 To modernize , expand and diversify the activities of
business.
 For buying the assets; they may be tangible like
machinery, factories, building etc. or intangible such
as trademark, patent etc.
 For running day- to day operations such as buying
raw materials, paying wages, salaries etc.

3. SOURCES OF FINANCEPERIOD
CLASSIFICATION
ON THE BASIS OF

4. Types of business finance on
the basis of period:
 Long term finance
 Medium term finance
 Short term finance

5. Long term finance
Funds which are required to be invested in a business
for a long period of time, that is more than five years
are known as long term finance.
FEATURES OF LONG TERM FINANCE
 Used for acquiring fixed assets like machinery, land,
building.
 It is required for expansion projects and adoption of
innovative techniques
METHOD OF RAISING LONG TERM FUNDS
Issue of shares, debentures and long term loans.
REQUIRED BY
Large scale enterprises

6. Medium term finance
It is the finance required by business enterprises for
more than one year but less than five years is
known as medium term finance.
FEATURES OF MEDIUM TERM FINANCE
 Used for introduction of new products,
modernization of plant and machinery.
METHOD OF RAISING MEDIUM TERM FINANCE
Accepting public deposits, medium term loans etc.
REQUIRED BY
Manufacturing industries

7. Short term finance
It is the finance required for a short period upto one
year is known as short term finance.
FEATURES OF SHORT TERM FINANCE
 Used to meet day- to – day requirements such as
holding stock of raw materials, spare parts.
METHOD OF RAISING SHORT TERM FINANCE
Credit granted in trade, short term loans from
commercial banks, commercial paper, factoring
REQUIRED BY
Trading companies

8. TYPES OF BUSINESS FINANCE
ON THE BASIS OF OWNERSHIP:
 Owner’s fund
 Borrowed fund

9. Owner’s fund
It refers to the funds contributed by the
owners as well as the accumulated profit of
the company. For e.g.: equity shares, retained
earning
FEATURES:
1. Source of permanent capital
2. Provision of risk capital
3. No security required

10. Borrowed funds
It refers to the borrowing of the firm. It
includes all funds available by way of loans or
credit.
FEATURES
1. Need to give security
2. Regular payment of interest has to be
made.
3. Holders do not get the right to control and
manage the activities of the firm.

11. METHODS OF RAISING FINANCE
 Retained earning
 Trade credit
 Public deposits
 Commercial paper
 Shares
 Debentures
 Commercial bank
 Financial institution
 International financing

12. Retained earning
It refers to undistributed profits after payment
of dividend and taxes.
FEATURES:
 Cushion of security
 Funds for new and innovative projects
 Medium and long term finance provider
 Conversion into ownership funds
 No cost
 No fixed liability
 No security required

13. Trade credit
It refers to an arrangement where by a
manufacturer is granted credit from the
supplier of raw material, input, spare part etc.
generally the duration is of 3- 6 months. It is
short term financing facility.
FEATURES
 Readily available
 Flexible
 No floatation cost

14. Public deposits
It refers to unsecured deposits invited from
the public.
FEATURES
 Need no security as raised from public
 Simple procedure to raise fund for the
duration of six months to 3 years.
 Reduction in tax liability
 No dilution of control

15. Commercial paper
It is an unsecured promissory note issued by
private and public sector companies with a fixed
maturity period of 3 to 12 moths. These are
generally issued by companies having a good
reputation.
FEATURES
 These are freely negotiable instruments
 Cost of issuing is very low
 Continuous source of fund
 Companies can also invest their money in
discounting the commercial paper.

16. share
Share is the smallest unit in which owner’s
capital of the company is divided.
According to companies act, a
public company can issue two types of shares:
Equity shares
Preference shares

17. Equity shares
It is a common security issued under permanent
or owner’s fund capital. Equity shareholders are
called the real owners of the company.
FEATURES
 Primary risk bearers of the company
 Claim over the left over income only
 Equity shareholders have the control over the
activities of the company
 At the time of high profit, shareholders enjoy
higher profit

18. Preference shares
These are those share which get preference
over equity shares in respect to:
The payment of dividend
Repayment during winding up
FEATURES
 Fixed rate of dividend
 No security
 Voting power
 Help to collect large amount of funds

19. debentures
They are common securities of borrowed fund
capital. It can be defined as ‘ a document or a
certificate’ issued by a company under its seal
as an acknowledgement of its debt
FEATURES
 Fixed rate of interest
 No voting rights
 Security required
 Redeemable i.e. can be redeemed or pay
back on expiry of fixed period

20. Commercial banks
They provide funds for different purposes and
different period. Generally commercial banks
provide short and medium term loans.
MERITS
 Bank keep the information of borrower
confidential
 No formalities of issue of prospectus
 Very flexible source of loan

21. Financial institutions
They are leading institution or development banks
that provide financial assistance and guidance to
industries and business enterprises.
FEATURES
 Provide medium and long term loan
 Provide financial as well as managerial advice
 Underwrite the public issue of shares and
debentures
 Provide loan guarantee

22. International source of finance
The main securities used by Indian companies
to tap international source of finance are
given below:
 Loans from commercial bank
 International agencies and development
banks
 International capital market
1. GDR
2. ADR
3. FCB

23. Financial management
It refers to efficient acquisition of finance,
efficient utilization of finance and efficient
distribution and disposal of surplus for smooth
working of company.
OR
It is mainly concerned with efficient acquision
and allocation of funds.

24. Objectives of financial management
PROFIT MAINTENANCE OF
MAXIMISATION LIQUIDITY
Maximization of wealth
of equity shareholder
PROPER MEETINGS OF
UTILISATION OF FINANCIAL
FUNDS COMMITMENTS

25. FINANCIAL DECISIONS:
 INVESTMENT DECISION
a) Capital budgeting
b) Working Capital
) FINANCING DECISION
a) Debt
b) Equity
) DIVIDEND DECISION
a) Profit
b) Retained earning

26. Capital structure
It means the proportion of debt and equity
used for financing the operations of business
CAPITAL STRUCTURE= DEBT/ EQUITY
Capital structure should be such that it
increases the value of equity share as
maximizes the wealth of equity shareholders

27. Working capital
It refers to excess of current assets over
current liabilities
 GROSS WORKING CAPITAL:
This refers to investment in all the current
assets such as cash, prepaid expenses.
 NET WORKING CAPITAL
This refers to excess of current assets over
current liabilities. It indicates the liquidity
position of the company,

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