Finance

1st Year POC - Principles of Commerce Notes

Finance



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Introduction



It is necessary for a businessman to plan financial aspect in the early
stage of starting any new business and it should not be left to chance.
From the starting and to any later expansion in the firm’s business,
finance plays a very important role in purchasing aspects and to meet
the expenses if necessary for carrying on the business affairs. The
financial needs of business are assessed by the size and the nature of
work. For a large business, financial needs are high as compared to a
small business. For example, the joint stock companies require large
amount of funds whereas sole proprietorship and the partnership business
require small amount of funds. Finance can be obtained through two
major resources owners’ capital and borrowed money. The requirements of
funds depend upon utilization that is how much funds will be needed for
circulating and fixed capital. The capital credit obtained from any
financial institution is known as borrowed money. Funds which are
required to purchase any asset and to meet the expenses from the initial
stages to the extension of any business is known as finance.





Kinds of Finance



Long Term Finance



Long term finance is that part of capital which is required by a
business enterprise to finance its blocked or fixed assets such as land
buildings, machinery and other appliances of permanent nature. In the
established undertakings, it is required for extending the scale
production and for the renewal and replacement of the fixed assets, or
for taking the advantages of new discoveries. Thus, it is needed for
considerable period of time, usually for 10 or more years and hence it
involves a high cost due to higher amount of interest.



SOURCES OF LONG TERM FINANCE:



The following are the various sources of obtaining long term finance.



1. SHARES:



The initial capital is obtained by a new concern by floating shares.
Shares represent equal portion into which the capital of a company is
divided. Shares may be issued directly by the company or through the
under writers. Selling of shares is the most important method of
securing fixed capital and the contributors are the general public.





2. BONDS AND DEBENTURES:



To raise sufficient capital and to draw the attraction of those people
who don’t find interest in investment, debentures are issued b y a
company. Debenture is a promissory note for the repayment of money
borrowed and the payment of interest at fixed rates. The contributor is
again the general public.





3. GOVERNMENT LOANS:



The state aid in the form of guarantee of dividend of new companies,
taking of securities, plays a definite role in the financing of
industries. In our country, industrial-finance Corporation was
established to give long term loans.





4. FINANCING INSTITUTIONS:



In Pakistan there are the following institutions from which different industries can take their finance for long periods:



A- PICIC:



This corporation aims at stimulating promotion of new industries, the
expansion of the existing ones and the furnishing of the technical
know-how as to increase production.



B- IDBP:



This bank was setup to provide credit and other facilities for the
development of industries. Other institutions are NDFC, BEL, investment
trusts, insurance companies and commercial banks.





5. PUBLIC DEPOSITS:



An enterprise can raise finance by the acceptance of deposits from the
public directly for fixed terms and at fixed rate of interest. This
method is however, dangerous and has declined in importance in recent
years.





6. PLOUGHING BANK OF EARNINGS:



This is very easy method of financing and is available to only
Established enterprises.re-investment of a part of the profits is an
ideal means of financing, expansion and improvements.





Short Term Finance



A common problem of every business is financing day –to –day operations.
Normally business finances these items out of the receipts from sales,
but some times the firms financing is needed. It is required for pour
hasting raw materials, additional inventory etc. for meeting purposes’
.it is required for short period ,generally foe one year .it is needs
because of the fact that the stock is to kept ready before it is
actually consumed.



Sources of Short Term Finance



The main sources of obtaining short–term loans are as following:





1. Commercial Banks



Finances are acquired from banks by means of loans, discounts overdrafts
etc. they provide short term finance in the shape of discounting bills,
granting loans and accepting bills on behalf of their customers.





2. Commercial Credit Houses



These institutions provide short term finance against mortgage of property or promissory notes.





3.Proprietor‘s Personals Funds



This is an important source of financing a small business. The
proprietors themselves supply the capital of the business from their own
pockets. But in large scale undertakings, this source is insufficient.





4. Borrowings from Friends and Relatives



Sometimes business is also finance by taking loans from friends and
relatives. Finance from this source is very limited and uncertain.





5. Public Deposits



Some units accept deposits from the public from short period on
attractive rates of interest and utilize the funds for their currents
financial requirements.





6. Indigenous Bankers



There are large number of money lenders i.e. Mahajan, Sahukar, Shroff in
the country who provide considerable sums for the business, though at a
high rate of interest.





7. Land Mortgagment



The financial institutions give loans on short–terms to he business man or industrialists on the security of land and bearable.





Foreign Exchange Banks



These banks also provide short term funds. They mainly provide finance to the foreign business undertaking of their nationality.





9. Unsecured Loans



This type of financing includes:



A) Promissory Notes:



They are the legal instruments used in advancing banks loans. It is the major source of the short–term finance.



b) Commercial Drafts:



A draft is an instruments made by one person ordering the second person
to pay a sun of money to a specified individual on sight or at a future
date. Secured loans: There are times when short term financing may be
accompanied by collaterals, which gives the lender the right to seize
certain property if the borrower does not replay the loan.





10. Secured Loans



There are times when short term financing may be accompanied by
collaterals, which gives the lender the right to seize certain property
if the borrower does not repay the load.