Sources of funds

A company might raise new funds from the following sources:

• The capital markets:

i) new share issues, for example, by companies acquiring a stock market
listing for the first time

ii) rights issues

• Loan stock

• Retained earnings

• Bank borrowing

• Government sources

• Business expansion scheme funds

• Venture capital

• Franchising.

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  Factors affecting Selection of
Sources of Funds
Company’s financial strategy
Leverage planned by the Company
Financial Leverage
Operating Leverage
Financial conditions in the economy
Risk profile of the Company & Industry
Aggressive profile
Conservative profile
Mixed profile

 Classification of Funds
Based upon the duration
Long-term Finance
Medium-term Finance
Short-term Finance
Based upon the source
Internal Financing
External Financing

 Internal financing & external

financing:

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 internal financing is the name for a firm using its profits as a source of capital for new
investment, rather than a) distributing them to firm's owners or other investors and b)
obtaining capital elsewhere. It is to be contrasted with external financing which consists
of new money from outside of the firm brought in for investment. Internal financing is
generally thought to be less expensive for the firm than external financing because the
firm does not have to incur transaction costs to obtain it, nor does it have to pay the taxes
associated with paying dividends. Many economists debate whether the availability of
internal financing is an important determinant of firm investment or not. A related
controversy is whether the fact that internal financing is empirically correlated with
investment implies firms are credit constrained and therefore depend on internal
financing for investment

 Equity
Ordinary Shares (Equities):
 Ordinary shareholders have voting rights
 Dividend can vary
 Last to be paid back in event of collapse
 Share price varies with trade on stock exchange
Preference Shares:
 Paid before ordinary shareholders
 Fixed rate of return
 Cumulative preference shareholders ² have right to
dividend carried over to next year in event of non-
payment

New Share Issues:

 arranged by Merchant or Investment banks
Rights Issue
 Existing shareholders given right to buy new shares
at discounted rate
Bonus or Scrip Issue
 Change to the Share Structure
 Increases number of shares and reduces value
 Market Capitalisation stays the same

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  Debentures
Debentures are Debt securities
Debentures holders have no right to vote
at the Board meetings of the companies.
Right to be paid back prior to Equity
holders in case of company being wound Up.

 Venture Capital
Early stage financing of new & young enterprises.
Features:
 Equity participation
 Long term investment
 Participation in management
Stages in venture capital financing
 Early stage financing
 Expansion financing
 Acquisition/buyout financing growth

 Process of venture capital

financing
Deal origination
Screening
Evaluation (due diligence)
Risk analysis
Deal structuring
Post-investment activity
Exit plan

 Commercial Papers (CP)

One of the non-bank sources of working capital
Finance
A Money Market instrument.

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Regulated by the directions of the Reserve Bank of
India.
Issued for a minimum period of 3 months and
maximum of 1 year
Issued in denominations of` 5 lakhs. But the
minimum lot of investment is` 25 lakhs per investor.

 Bank Overdraft
Easy to get
More Flexibility
Expensive mode of Finance

 Factoring
A factor buys up the receivable from the seller.
provides immediate finance to the seller in
consideration of assigning the receivable to him.
The factor makes the conversion of receivables
into cash possible.
Risk of the debt going bad is passed on to the
factor

 Grants
Specific Conditions
 Location
 Size
 Sector of industry
Rigid conditions across the board
Usually relatively small amounts

 Business Angels
Business Angel = private investor who might invest
their own money in your business.

Angel Network = organisation that links suitable

businesses to its membership of

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Angel investors

High Capital Returns for risks involved

Often retired· entrepreneurs, who are always looking
for new investment opportunities to increase their own
wealth

 Long Term Financing

S o u rc e U se
 Equity Fixed Asset
 Ordinary Shares Capital
Expenditure
 Preference Shares Land
 Bank Loans Building
 Debentures Plant
 Hire-Purchase Equipment
 Leasing

 Short Term Financing

S o u rc e U se
 Bank Loans Working
Capital
 Bank Overdrafts Debtors
 Trade Credit Stocks
 Factoring

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 Applications of funds

Fixed Assets
Fixed asset, also known as a non-current asset or as property, plant, and equipment
(PP&E), is a term used in accounting for assets and property which cannot easily be
converted into cash. This can be compared with current assets such as cash or bank
accounts, which are described as liquid assets. In most cases, only tangible assets are
referred to as fixed.

Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a
firm's consumers/end-users. As an example, a baking firm's current assets would be its
inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit
(i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets
would be the oven used to bake bread, motor vehicles used to transport deliveries, cash
registers used to handle cash payments, etc. Each aforementioned non-current asset is not
sold directly to consumers.

These are items of value which the organization has bought and will use for an extended
period of time; fixed assets normally include items such as land and buildings, motor
vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and
machinery. These often receive favorable tax treatment (depreciation allowance) over
short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets
are assets whose future economic benefit is probable to flow into the entity, whose cost
can be measured reliably.

It is pertinent to note that the cost of a fixed asset is its purchase price, including import
duties and other deductible trade discounts and rebates. In addition, cost attributable to
bringing and installing the asset in its needed location and the initial estimate of
dismantling and removing the item if they are eventually no longer needed on the
location.

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The primary objective of a business entity is to make profit and increase the wealth of its
owners. In the attainment of this objective it is required that the management will
exercise due care and diligence in applying the basic accounting concept of “Matching
Concept”. Matching concept is simply matching the expenses of a period against the
revenues of the same period.

The use of assets in the generation of revenue is usually more than a year- that is long
term. It is therefore obligatory that in order to accurately determine the net income or
profit for a period depreciation is charged on the total value of asset that contributed to
the revenue for the period in consideration and charge against the same revenue of the
same period. This is essential in the prudent reporting of the net revenue for the entity in
the period.

Net book value of an asset is basically the difference between the historical cost of that
asset and it associated depreciation. From the foregoing, it is apparent that in order to
report a true and fair position of the financial jurisprudence of an entity it is relatable to
record and report the value of fixed assets at its net book value. Apart from the fact that it
is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset
should be carried at the net book value, it is the best way of consciously presenting the
value of assets to the owners of the business and potential investor.

Working capital:
Working capital (abbreviated WC) is a financial metric which represents operating
liquidity available to a business, organization, or other entity, including governmental
entity. Along with fixed assets such as plant and equipment, working capital is
considered a part of operating capital. Net working capital is calculated as current assets
minus current liabilities. It is a derivation of working capital, that is commonly used in
valuation techniques such as DCFs (Discounted cash flows). If current assets are less than
current liabilities, an entity has a working capital deficiency, also called a working
capital deficit.

Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities
A company can be endowed with assets and profitability but short of liquidity if its assets
cannot readily be converted into cash. Positive working capital is required to ensure that a
firm is able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and payable and
cash.

Fixed assets must be classified in a company's balance sheet as intangible, tangible, or

investments. Examples of intangible assets include goodwill, patents, and trademarks.

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Examples of tangible fixed assets include land and buildings, plant and machinery, fixtures and
fittings, motor vehicles and IT equipment.

Current assets
Current assets are cash and other assets expected to be converted to cash, sold, or
consumed either in a year or in the operating cycle (whichever is longer), without
disturbing the normal operations of a business. These assets are continually turned over in
the course of a business during normal business activity. There are 5 major items
included into current assets:

1. Cash and cash equivalents — it is the most liquid asset, which includes
currency, deposit accounts, and negotiable instruments (e.g., money orders,
cheque, bank drafts).
2. Short-term investments — include securities bought and held for sale in the near
future to generate income on short-term price differences (trading securities).
3. Receivables — usually reported as net of allowance for uncollectable accounts.
4. Inventory — trading these assets is a normal business of a company. The
inventory value reported on the balance sheet is usually the historical cost or fair
market value, whichever is lower. This is known as the "lower of cost or market"
rule.
5. Prepaid expenses — these are expenses paid in cash and recorded as assets
before they are used or consumed (a common example is insurance). See also
adjusting entries.

The phrase net current assets (also called working capital) is often used and refers to the
total of current assets less the total of current liabilities.

Long-term investments
Often referred to simply as "investments". Long-term investments are to be held for many
years and are not intended to be disposed of in the near future. This group usually
consists of four types of investments:

1. Investments in securities such as bonds, common stock, or long-term notes.

2. Investments in fixed assets not used in operations (e.g., land held for sale).
3. Investments in special funds (e.g. sinking funds or pension funds).

Different forms of insurance may also be treated as long term investments.

Intangible assets
Intangible assets lack physical substance and usually are very hard to evaluate. They
include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These
assets are (according to US GAAP) amortized to expense over 5 to 40 years with the
exception of goodwill.

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Websites are treated differently in different countries and may fall under either tangible
or intangible assets.

Tangible assets
Tangible assets are those that have a physical substance and can be touched, such as
currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals.

Balance sheet OF Reliance Industries Ltd.

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Sources of funds
Owner's fund
Equity share capital 3,270.37 1,573.53 1,453.39 1,393.21 1,393.17
Share application money - 69.25 1,682.40 60.14 -
Preference share capital - - - - -
Reserves & surplus 1,25,095.97 1,12,945.44 77,441.55 59,861.81 43,760.90

Loan funds
Secured loans 11,670.50 10,697.92 6,600.17 9,569.12 7,664.90
Unsecured loans 50,824.19 63,206.56 29,879.51 18,256.61 14,200.71
Total 1,90,861.03 1,88,492.70 1,17,057.02 89,140.89 67,019.68

Uses of funds
Fixed assets
Gross block 2,15,864.71 1,49,628.70 1,04,229.10 99,532.77 84,970.13
Less : revaluation reserve 8,804.27 11,784.75 871.26 2,651.97 4,650.19
Less : accumulated
62,604.82 49,285.64 42,345.47 35,872.31 29,253.38
depreciation
Net block 1,44,455.62 88,558.31 61,012.37 61,008.49 51,066.56
Capital work-in-progress 12,138.82 69,043.83 23,005.84 7,528.13 6,957.79
Investments 19,255.35 20,268.18 20,516.11 16,251.34 5,846.18

Net current assets

Current assets, loans &
66,595.32 56,298.09 44,743.86 30,210.99 24,696.15
advances
Less : current liabilities & 51,584.08 45,675.71 32,221.16 25,858.06 21,547.00

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 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
provisions
Total net current assets 15,011.24 10,622.38 12,522.70 4,352.93 3,149.15
Miscellaneous expenses not
- - - - -
written
Total 1,90,861.03 1,88,492.70 1,17,057.02 89,140.89 67,019.68

Notes:
Book value of unquoted
15,563.83 18,927.65 12,746.75 9,438.20 5,322.60
investments
Market value of quoted
8,248.22 2,930.63 53,126.09 24,454.46 780.71
investments
Contingent liabilities 25,531.21 36,432.69 37,157.61 46,767.18 24,897.66
Number of equity
32703.74 15737.98 14536.49 13935.08 13935.08
sharesoutstanding (Lacs)

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