Retained Earnings, Institutional Borrowing and Public Deposit

1. Topics
Retained Earnings
Institutional Borrowing
Public Deposit

2. Retained earnings
 Retained earnings are the profits that a company has earned to
date, less any dividends or other distributions paid to investors. This
amount is adjusted whenever there is an entry to the accounting
records that impacts a revenue or expense account.
 A large retained earnings balance implies a financially healthy
organization.
 The formula for ending retained earnings is:
Ending retained earnings =Beginning retained earnings +
Profits/losses - Dividends

3.  A company that has experienced more losses than gains to date, or
which has distributed more dividends than it had in the retained earnings
balance, will have a negative balance in the retained earnings account.
This negative balance is called an accumulated deficit.
When evaluating the amount of retained earnings that a company,
consider the following points:
Age of the company -An older company will have had more time
in which to compile more retained earnings.
 Dividend policy- A company that routinely issues dividends will
have fewer retained earnings.
 Profitability- A high profit percentage eventually yields a large
amount of retained earnings.

4. Institutional Borrowing
 Finance is the life blood of business. The goal of a business firm
is to produce and distribute goods and services to the society.
Achieving this goal requires the performance of business functions
such as production, distribution etc
 All of these activities require funds. A business firm must
arrange sufficient amount of funds for its various requirements,
otherwise its survival and growth will be in danger.

5. TERM LOAN
 A term loan is a business loan with a maturity of more than 5
years
 Term loans are retired by systematic repayments.
 Term loan is available on financial institutions and banks for
setting up new projects as well as for expansion, modernization, or
rehabilitation of the existing units.

6.  The institutions which provide term loan are classified into 3
major categories:
1) Commercial Bank
2) Development Bank
3) Investment Institutions

7.  Commercial bank
Commercial bank are institution that grant medium to long term loans
for financing of new industrial projects as well as for expansion,
diversification and modernization of existing industrial units.
 Development banks
Development banks are the institutions which supply capital,
knowledge and enterprise for business .These institutions are the All
India development banks such as IDBI,ICICI and IRBI which cater to
the needs of industry

8.  Investment institutions
 Investment institutions include financial institutions such as LIC,
GIC, UTI and Mutual Funds.
 These institutions collect investments from individual investors in
the form of premium.
The Non Banking Finance Companies (NBFC) may also be included
in the investment institutions.

9. Public Deposits
 Public deposits refer to the unsecured deposits invited by
companies from the public mainly to finance working capital needs. A
company wishing to invite public deposits makes an advertisement in
the newspapers.
 Any member of the public can fill up the prescribed form and
deposit the money with the company. The company in return issues a
deposit receipt. This receipt is an acknowledgement of debt by the
company
 A company can invite public deposits for a period of six months to
three years. Therefore, public deposits are primarily a source of short-
term finance.

10. Merits of Public Deposits
 Simplicity
Public deposits are a very convenient source of business finance. The
company raising deposits has to simply give an advertisement and
issue a receipt to each depositor.
 No Charge on Assets
Public deposits are unsecured and therefore ,do not create any charge
on the company’s assets.
 Flexibility
Public deposits can be raised during the season to buy raw materials in
bulk and for other short-term needs. They can be returned when the
need is over.

11.  Wide Contacts
Public deposits enable a company to build up contacts with a wider
public.
 No Dilution of Control
There is no dilution of shareholders control because the depositors
have no voting rights.

12. Demerits of Public Deposits
 Uncertainty
Public deposits are an uncertain source of finance. They may withdraw
their deposits whenever they feel shaky about the financial health of
the company.
 Limited Funds
A limited amount of funds can be raised through public deposits due to
legal restrictions.
 Temporary Finance
The maturity period of public deposits is short. The company cannot
depend upon public deposits for meeting long-term financial needs.

13. Thank You