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MANAGING FINANCIALMANAGING FINANCIAL

RESOURCESRESOURCESSources Of Finance

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SourceSource ofof FinanceFinance

When a need arise for finance

How much cash is currently held?

Consider Future Cash flows

Consider tightening its control of capital to improvecash position.

Early settlement, running down stock levels

and lengthening the payment period can be

done, but it is more risky.

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Source of Finance Contd..Source of Finance Contd..

OWNERS CAPITAL(Sole Proprietorship, Partnership and Companies)

y Shares Gives right to the owner to share profits and losses of the

company.

Return in form of dividend is paid on the basis of profits earned. Shareholder have voting rights

Two types of sharesx Ordinary shares

x Shares giving right ofvoting and receiving a dividend.

x Preferred sharesx Have fixed dividends and generally novoting right in general

meetings.

x Have preference over ordinary shares

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Shares

y Advantages

Cover long term needs, can raise large cash

Partnership can be extended to company

No dividends paid if no profit is earned All returns (from new investments) will go to

the shareholders

y Disadvantages

New issue involves expenses

Number ofowners increases, profit have todistributed among the share holders.

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y Retained Profit

Part of profit that is not spent, ( not distributed as

dividends) provides a common means of raising funds.

y Advantages

Simple and low cost

All gains still go to shareholders.

y Disadvantages

Investors will expect low dividends.

May not provide sufficient funds

Involves opportunity Cost

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y Working Capital

Short-term capital that a business keeps to payfor the every day activities of business likestationary needs, staff salaries, bills etc.

Working Capital = Current assets - Current liabilities

y Advantages Easily available

Does not involve any direct cost

y Disadvantages

Suitable for small projects

Cashflow problems may arise

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BORROWING / DEBT

y Loans

An obligation on company for which it have to pay regular

interest for a specific period. Can be secured or unsecured.

x Bank Loans (business plan is usually required)

x Mortgages

x Loan from other sources

y Advantages

Banks try to ensure that loan in some way match the assets life

Fixed interest have to be paid (both an advantage and

disadvantage)

y Disadvantage

Have to pay more then borrowed

Results in an obligation

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y Leasing

Contract between leasing company (lessor)

and the customer (the lessee) that allows the

business to use an asset without having to buyit completely.

Two types of Leasing

x Operating lease

x Lessor supplies asset to the lessee for short period of time.

x Finance Lease

x Contract of lease is for all of the assets expected life.

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Leasing

y Advantages Fixed rate financing, inflation friendly

Do not need to make immediate large cash payments

Paying for equipment only for the time, asset is

needed. Upgrading of equipment

Option to buy at end of lease

y Disadvantages Obligation to continue payment

Can not purchase asset until end of lease

Maintenance done by lessee

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y

Hire Purchase Allows a business to use an asset without having to

pay for it immediately.

Similar to leasing, except for the fact that ownership

of goods passes to the hire purchase customer onpayment of final installment.

y Creditors

Suppliers allows the organizations to buy now and pay

for them later. Government can allow the organizations to defer the

tax payments.

Other creditors can provide this facility for Rent,

utility bills, etc.

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y Debt Factoring

Business faces problems,when sales on creditare rising rapidly.

Factors are organizations that offer theirclients a financing service toovercome theproblems.

x Factor pays organizations a set proportion of theinvoice value within a pre-arranged time.

x Factor issues statements on organizations behalfand collects payments from customers.

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Debt Factoring

y Advantages Maximize cash flow

Reduce time and money for collecting debt

Efficient way of doing business overseas

y Disadvantages

Factors take over control of sales records.

Creates a break in personal contact with the

customers. Factoring may impose constraints.

Ending factoring can be difficult, have torepurchase sales records

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Cost Of FinanceCost Of Finance

y Includes cost ofobtaining the finance and

cost of managing finance Fees paid to financial consultants, etc.

Fees or interest paid.

Income generated by investment is tax deductible.

y Shares Capital or Owners savings Dividend in cash

Scrip dividends

Providing information to the share holders

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Cost Of FinanceCost Of Financey B

orrowed funds Interest

Initial arrangement fee to cover lendersadministrative costx Such cost is incurred in checking references, setting up

data etc. Loan itself have to be repaid

Factors charge commission

Financial and non financial costs arises fromrelationship between lender and borrowerx Providing information about performancex Lender might demand immediate repayment

(Insolvent,Default, Bankrupt)

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Selecting Appropriate Source ofSelecting Appropriate Source of FinanceFinance

First consideration should be how much

finance is needed.

Can finance be raised from internal resource

or from outside the business? If finance needs to be raised internally,what

source should be selected?

If external source is to be used, from where

finance can be raised and in which form?

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y Financing strategy should take into

account: Duration for which finance is required

Available options for particular need

Cost of sources of finance

Financial performance of firm specially gearing and

interest cover

Flexibility to adapt the amount of finance to changingneeds

The stage of development business

Required security (if any)

Selecting Appropriate Source of FinanceSelecting Appropriate Source of Finance

Contd..Contd..

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Thank You

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