Source of Finance 8 Sept

8/4/2019 Source of Finance 8 Sept

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BUISNESS FINANCE



BUSINESS FINANCE

MEANING

Business finance refers to money andcredit employed in business. It involvesprocurement and utilization of funds sothat business firms maybe able to carryout their operations effectively and

efficiently.



BUSINESS FINANCE

The following characteristics of business finance will make itsmeaning more clear:-

Business finance includes all types of funds used in business.

Business finance is needed in all types of organizations large

or small, manufacturing or trading. The amount of business finance differs from one business

firm to another depending upon its nature and size.It also varies from time to time.

Business finance involves estimation of funds. It is concerned

with raising funds from different sources as well as investment offunds for different purposes.



Need and Importance

Business finance is required for the establishment of everybusiness

organization. With the growth in activities, financial needs alsogrow.

Funds are required for the purchase of land and building,

machinery and other fixed assets.Besides this, money isalso needed to meet day-today expenses

e.g. purchase of raw material, payment of wages and salaries,electricity bills, telephone bills etc. You are aware that

production

continues in anticipation of demand.Expenses continue to beincurred until the goods are sold and money is recovered.Money is required to bridge the time gap between

production and sales.



SOURCE OF FINANCE

The Long-Term Finance may be Raised by theCompanies from the following Sources:-

Capital Market

Special Financial Institutions

Leasing Companies

Foreign Sources

a] Foreign Collaborators

b] International Financial Institutions

c] Non-Resident Indians

Retained Profits or Reinvestment of Profits



SOURCE OF FINANCE

Short-Term Finance may be Raised by the Companiesfrom the following Sources :-

1] Trade Credit

2] Installment Credit3] Accounts Receivable Financing4] Customer Advance5] Bank Credit

a] Loanb] Cash creditc] Overdraftsd] Discounting of bills



COST OF PROJECT

The cost of capital is a term used in the field offinancial investment to refer to the cost of acompany's funds (both debt and equity), or,from an investor's point of view "theshareholder's required return on a portfolio ofall the company's existing securities".[1] It isused to evaluate new projects of a companyas it is the minimum return that investors

expect for providing capital to the company,thus setting a benchmark that a new projecthas to meet.

http://en.wikipedia.org/wiki/Cost_of_capital

http://en.wikipedia.org/wiki/Cost_of_capital



COST OF DEBT

The cost of debt is relatively simple tocalculate, as it is composed of the rate ofinterest paid. In practice, the interest-rate paid

by the company can be modelled as the risk-free rate plus a risk component (risk premium),which itself incorporates a probable rate ofdefault (and amount of recovery given default).

For companies with similar risk or creditratings, the interest rate is largely exogenous (not linked to the company's activities).

http://en.wikipedia.org/wiki/Risk_premium

http://en.wikipedia.org/wiki/Bond_credit_rating


http://en.wikipedia.org/wiki/Exogenous

http://en.wikipedia.org/wiki/Exogenous



http://en.wikipedia.org/wiki/Risk_premium



COST OF EQUITY

The cost of equity is more challenging tocalculate as equity does not pay a set return toits investors. Similar to the cost of debt, the

cost of equity is broadly defined as the risk-weighted projected return required byinvestors, where the return is largely unknown.The cost of equity is therefore inferred by

comparing the investment to other investments(comparable) with similar risk profiles todetermine the "market" cost of equity.



ASSESSMENT OF WORKING CAPITAL

Any enterprise whether industrial, trading or otheracquires two types of assets to run its business as hasalready been emphasised time and again. It requiresfixed assets which are necessary for carrying on the

production/business such as land and buildings, plantand machinery, furniture and fixtures etc. For a goingconcern these assets are of permanent nature and arenot to be sold. The other types of assets required forday to day working of a unit are known as current

assets which are floating in nature and keep changingduring the course of business. It is these 'currentassets' which are generally referred to as 'workingcapital'



WORKING CAPITAL

We are by now already aware of the short-term natureof these assets which are classified as current assets.It may be noted here that there may not be any fixedratio between the fixed assets and floating assets for

different projects as their requirement would differdepending upon the nature of project. Big industrialprojects may require substantial investment in fixedassets and also large investment for working capital.The trading units may not require heavy investment in

fixed assets while they may be carrying huge stocks intrade. The service units may hardly require anyworking capital and all investment may be blocked increation of fixed assets.



WORKING CAPITAL

The total current assets with the firm may be taken as gross working capitalwhereas the net working capital with the unit may be calculated as under:

Net Working Capital = Current Assets - Current Liabilities(NWC) (GWC) (bank borrowings)

This net working capital is also sometimes referred to as 'liquid surplus' withthe firm and has been margin available for working capital requirements of theunit. Financing of working capital has been the exclusive domain ofcommercial banks while they also grant term loans for creation of fixed assetseither on their own or in consortium with State level/All India financialinstitutions. The financial institutions are also now considering sanction ofworking capital loans.

The current assets in the example given in the earlier paragraph are financedas under:Current Assets = Current liabilities + Working capital limits from banks +Margin from long-term liabilities



ASSETS

Liabilities Assets

Capital Fixed Assets

Long-termliabilities

Margin NWC

Liquid Surplus

Working capitallimits from

banks

Current Assets

“This is the normalpattern of financingof current assets”



OPERATING CYCLE CONCEPT

The day to day business operations of a concern of any natureand, size involves many successive steps and final workingresults would depend on the effective combination of all thesesteps. The steps in general may include :-

Acquisition and storage of raw material and other stores andspares required for manufacture of any product.

Actual production process when the raw material is subjected todifferent processes to bring it to final shape of finished goods.

Storage of finished goods awaiting sales.

Sales of finished goods and realisations of sale proceeds



Financial Analysis

Financial analysis (also referred to as financialstatement analysis or accounting analysis)refers to an assessment of the viability,stability and profitability of a buisness, sub-business or project.

It is performed by professionals who preparereports using ratios that make use ofinformation taken from financial statementsand other reports. These reports are usuallypresented to top management as one of theirbases in making business decisions.



Goals Of Financial Analysis

Financial analysis often assess the firm's:

1. Profitability -its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based onthe income statement, which reports on the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third

parties in the long-term;

3. Liquidity - its ability to maintain positive cash flow, while satisfyingimmediate obligations;

Both 2 and 3 are based on the company's balance sheet , which indicates the financial condition of a business as of a given point in time.

4. Stability- the firm's ability to remain in business in the long run, withouthaving to sustain significant losses in the conduct of its business. Assessinga company's stability requires the use of both the income statement and thebalance sheet, as well as other financial and non-financial indicators. etc

http://en.wikipedia.org/wiki/Income_statement

http://en.wikipedia.org/wiki/Cash_flow

http://en.wikipedia.org/wiki/Balance_sheet


http://en.wikipedia.org/wiki/Cash_flow




Understand, Identify, Analyze and Adjust

Understanding your organization’s financialhealth is a fundamental aspect of respondingto today’s increasingly stringent financialreporting requirements. To avoid risks,

organizations must quickly Identify as certain financial ratios and trends

across in liabilities and assets Analyze and adjust planned and forecasted

amounts Act to provide regulatory statements as

needed



Methods Of Financial Analysis

Financial analysts often compare financial ratios (of solvency,profitability, growth, etc):

Past Performance - Across historical time periods for the samefirm (the last 5 years for example),

Future Performance - Using historical figures and certainmathematical and statistical techniques, including present andfuture values, This extrapolation method is the main source oferrors in financial analysis as past statistics can be poorpredictors of future prospects.

Comparative Performance - Comparison between similar firms.

These ratios are calculated by dividing a (group of) accountbalance(s), taken from the balance sheet and / or the incomestatement.

http://en.wikipedia.org/wiki/Financial_ratios

http://en.wikipedia.org/wiki/Solvency

http://en.wikipedia.org/wiki/Profit_%28accounting%29







http://en.wikipedia.org/wiki/Profit_%28accounting%29

http://en.wikipedia.org/wiki/Solvency

http://en.wikipedia.org/wiki/Financial_ratios



Financial Analysis with MicroStrategy

The MicroStrategy platform offers analytics that can be used to answerkey financial questions:

What is the aging distribution of Accounts Payable and AccountsReceivable?

Are there any customers with payment problems; if so, who needs to

be notified?

What are the values of assets and liabilities on a given date?

What is the value of assets, liabilities, and owners’ equity on a givendate?

What is the breakdown of expenses by business units?

Which business units are hitting their targets?

What are the revenue trends by business units?



Documents

Source of Finance 8 Sept