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Sources of Business Finance NCERT Textbook With Solutions PDF Free Download
Chapter 8: Sources of Business Finance
This chapter provides an overview of the various sources from which funds can be procured for starting as also for running a business.
It also discusses the advantages and limitations of various sources and points out the factors that determine the choice of a suitable source of business finance.
It is important for any person who wants to start a business to know about the different sources from where money can be raised. It is also important to know the relative merits and demerits of different sources so that choice of an appropriate source can be made.
Meaning, Nature, and Significance of Business Finance Business is concerned with the production and distribution of goods and services for the satisfaction of the needs of society. For carrying out various activities, business requires money.
Finance, therefore, is called the lifeblood of any business. The requirement of funds by business to carry out its various activities is called business finance.
A business cannot function unless adequate funds are made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the business.
A business person, therefore, has to look for different other sources from where the need for funds can be met.
A clear assessment of the financial needs and the identification of various sources of finance, therefore, is a significant aspect of running a business organisation.
The need for funds arises from the stage when an entrepreneur makes a decision to start a business. Some funds are needed immediately say for the purchase of plant and machinery, furniture, and other fixed assets.
Similarly, some funds are required for day-to-day operations, say to purchase raw materials, pay salaries to employees, etc. Also when the business expands, it needs funds.
The financial needs of a business can be categorized as follows: (a) Fixed capital requirements: In order to start a business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures.
This is known as fixed capital requirements of the enterprise. The funds required in fixed assets remain invested in the business for a long period of time.
Different business units need a varying amount of fixed capital depending on various factors such as the nature of business, etc. A trading concern, for example, may require a small amount of fixed capital as compared to a manufacturing concern.
Likewise, the need for fixed capital investment would be greater for a large enterprise, as compared to that of a small enterprise. (b) Working capital requirements:
The financial requirements of an enterprise do not end with the procurement of fixed assets. No matter how small or large a business is, it needs funds for its day-to-day operations.
This is known as the working capital of an enterprise, which is used for holding current assets such as stock of material, bills receivables, and for meeting current expenses like salaries, wages, taxes, and rent.
The amount of working capital required varies from one business concern to another depending on various factors. A business unit selling goods on credit, or having a slow sales turnover, for example, would require more working capital as compared to a concern selling its goods and services on a cash basis or having a speedier turnover.
The requirement for fixed and working capital increases with the growth and expansion of business. At times additional funds are required for upgrading the technology employed so that the cost of production or operations can be reduced.
Similarly, larger funds may be required for building higher inventories for the festive season or meeting current debts or expanding the business, or to shift to a new location.
It is, therefore, important to evaluate the different sources from where funds can be raised. 8.3 Classification of Sources of Funds In case of proprietary and partnership concerns, the funds may be raised either from personal sources or borrowings from banks, friends etc.
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NCERT Solutions Class 11 Business Studies Chapter 8 Sources of Business Finance
1. Explain trade credit and bank credit as sources of short-term finance for business enterprises.
Trade credit: The credit offered by one supplier to a purchaser of goods is called as trade credit. This helps in promoting sale of goods and services, as the purchaser is not required to make payment at that time in the form of cash. Such credit is granted only to creditworthy customers. There are factors that influence the volume and period of the credit and they are:
1. Financial position of seller
2. Past payment record
3. Volume of purchases
Benefits of trade credit:
1. It helps a company in accumulating inventories for increasing sales in future.
2. Trade creditors do not have any rights over company assets. Therefore assets can be mortgaged for raising money from other sources.
Bank credit: Commercial banks provide source of funds and these funds are used for different purposes and time periods in the form of overdrafts, cash credits, and discounting bills. These loan needs to be paid in lump sum or by paying in installments.
Benefits of bank credit
1. There is secrecy in providing information about their customers.
2. Provides flexibility in terms of loan repayment.
2. Discuss the sources from which a large industrial enterprise can raise capital for financing modernization and expansion.
Following sources of capital are suitable for raising capital for expansion:
1. Equity Shares: These are the shares that are part of owner’s capital. The persons holding such shares are known as equity shareholders and they enjoy decision-making capacity in management, they also get high returns when the profits of the business get higher.
2. Preference Shares: This is a type of share that gives shareholders a preferential right with regard to repayment of capital and earning payments after a period of time. The payment to preference shareholders is done as per the Section 80 of the Companies Act, 1956
3. Loans: A business can borrow funds from bank and similar financial institutions for a fixed time at a fixed rate/variable rate, they have to pay interest.
4. Retained earnings: These are parts of profit that are kept for use in future. It is called as retained earnings.
5. Debentures: These are instruments that are helpful in raising long term capital. Debentures are like loans having a fixed rate of return.
3. What advantages does issue of debentures provide over the issue of equity shares?
Debentures provide the following advantages over equity shares:
1. Issuing equity shares makes the shareholders own the company, and they become entitled to voting rights while debenture holders do not have any rights in the organization. They get a fixed amount in form of payment. Debentures thus do not contribute towards dilution of ownership of company and can be issued without any risk.
2. For issuing shares, the company has to bear huge costs, also dividends payment is not tax deductible. For interest paid to debenture company receives tax deductions, so issuing debenture is beneficial.
3. Debentures are having a fixed rate of return. So if no profit is also earned, then also the company needs to pay the dividend, which is at a fixed rate, on the other hand, a company issuing equity shares and making profit needs to share more with the shareholders, which varies with the profit earned. Thus, it is better to issue debentures.
NCERT Class 11 Business Studies Textbook Chapter 8 Sources of Business Finance With Answer PDF Free Download