Financial Management

1. Dr. Sunita Sukhija
Assistant Professor in Commerce
Govt. National College, Sirsa(HRY)

2.  Business simply cannot function without money, and
the money required to make a business function is
known as business funds. Throughout the life of
business, money is required continuously. Sources of
funds are used in activities of the business. They are
classified based on time period, ownership and
control, and their source of generation.

3.  Finance is the major part in running a firm. Distribution of
finance to each and every department is based upon the
requirements of that department and the situation of the
business. Requirement of finance can be broadly classified
into following −
 Long term or fixed capital financial requirement.
 Short-term or working capital requirement.
 Sources of finance shows the mobilization of funds for
their requirement. To meet their long term and short term
requirements firm needs amounts to meet their
requirements. Based on mobilization of funds various
sources are classified as below

4. Sources of Finance
DIFFERENT FINANCIAL NEEDS OF BUSINESS:
 Long Term Financial needs:
 5-10 years
 All investment in plant and machinery and permanent and hardcore working
capital
 Medium Term Financial Needs:
 more than 1 year but less than 5 years
 Example – differed revenue expenditure, Special projects, Working capital
for Special orders etc.
 Short Term financial needs:
 less than 1 year
 typically to finance working capital such as stocks debtors etc.

5. Basic Principle
 LONG TERM REQUIREMENTS SHOULD
BE FUNDED THROUGH LONG TERM
SOURCES
 SHORT TERM REQUIREMENTS
THROUGH SHORT TERM SOURCES

6. Sources of long term Finance
 Equity Share Capital (including premium)
 Preference Share Capital
 Retained Earnings
 Bonds and Debentures
 Loans from Financial Institutions (Central,State,
Development andSpecific)

7. Equity Share Capital
 Equity shares is the most important source of raising long
term capital by a company. Equity shares represent the
ownership of a company and thus the capital raised by
issue of such shares is known as ownership capital or
owner’s funds.
 Features of ESC:
 Residual Claim on Income
 Residual Claim on Assets
 Right to Control
 Pre-Emptive Right
 Limited Liability

8. Preference Share Capital
 Preference share capital carry preferential rights over
equity in terms of dividend and return of capital. This
capital carry fixed rate of dividend.
 Features of PSC
 Claim on Income
 Claim on Assets
 Fixed Dividend
 No Controlling Power
 Cumulative/Redemption/Convertible/Participatory

9. Debenture
 Debenture is a certificate issued by a company under its
seal acknowledging a debt due by its to its holder. Funds
acquired by issue of debenture represent loan taken by
company is known as debt capital.ome
 Features of Debenture:
 Claim on Income
 Claim on Assets
 Fixed rate of interest
 No controlling Power
 Cheap source of Finance
 Maturity

10. Retained Earnings
 It is also called internal Financing. Retained earning is
made by transferring part of profit to various reserves
i.e. General Reserve, Reserve Fund, Replacement Fund
 Feartures of R.E.
 Cheap Source
 Make Company Self Independent
 Increase the Creditworthiness
 Help to pay long term Liabilities
 Help to make Balanced Dividend Policy

11. Loan from Financial Institutions
 Govt. has established many financial institiutions
which provide long term and medium term loan to
industrial Undertakings i.e.
 IDBI
 ICICI
 IFCI
 IRCI
 LIC
 GIC
 SFCs

12. Short term Finance
 Short term financing means financing for a period of less than 1
year. The need for short-term finance arises to finance the
current assets of a business like an inventory of raw material and
finished goods, debtors, minimum cash and bank balance etc.
Short-term financing is also named as working capital financing.
Short term finances are available in the form of:
 Trade Credit
 Cash Credit
 Short Term Loans like working capital loan from Commercial
Banks
 Fixed Deposits for a period of 1 year or less
 Advances received from customers
 Creditors
 Bill Discounting

13. Trade Credit
 Just as a firm grants credit to its customers it can also
get credit from the manufacturers or wholesalers or
suppliers. It is known as trade or mercantile credit.
 According to Howard and Upton, trade credit may be
defined as- “the credit extended by the seller to the
buyers at all levels of production and distribution
processes down to the retailer”.
 The usual duration of this credit ranges from 30 to 90
days. It is granted to the company or firm on “Open
account” without any security except that of the
goodwill and financial standing of the buyer.

14. Cash Credit
 Cash credit can be defined as an arrangement made by
the bank for the clients to withdraw cash exceeding
their account limit. The cash credit facility is generally
sanctioned for one year, but it may extend up to three
years in some cases. In case of special request by the
client, the time limit can be further extended by the
bank. The extension of the allotted time depends on
the consent of the bank and past performance of the
client. The rate of interest charged by the bank on cash
credit depends on the time duration for which the cash
has been withdrawn and the amount of cash.

15. Short term Bank Loan
 Short-term bank financing plays a key role in the
growth of a firm. Frequently during the course of a
year there is a period in which cash inflows are not
sufficient to meet cash outflow demands. Short-term
bank financing is one important vehicle by which a
firm can be carried through such periods.
 This form of financing appears as a note payable on
the balance sheet at a specific rate of interest. It is
second only to trade credit in importance.

16. Customer Advance
 Many times the manufacturers or the suppliers insist on, advance
by the customers particularly in case of special orders or big
orders. The customer advance forms part of the price of the
products ordered by him.
 Some times, the customer also tenders the full price. This is an
interest free source of finance. The period of such credit depends
upon the time taken to delivery of goods. The availability of this
credit also depends on the following factors:
 1. Competitive conditions in the market — If acute competition
prevails, the supplier cannot insist the buyer to pay an advance.
 2. Customs of the trade and usage.
 3. Reputation of the supplier.

17. Bill Discounting/ Factoring
Bill Discounting/Factoring comprises complementary
financial services, which is provided to the borrowers.
The borrower has freedom to select the set of services
provided by the factoring enterprise. Factoring is a
transaction whereby a business sells its statement of
receivable to a factor at a discount rate, to raise fund
for financing short-term projects.
The factoring services were introduced in India by the
State Bank of India Factoring and Commercial
Services Ltd. (SBIFACS) on 11th April 1991 for financing
short-term projects.