Introduction to Sources of Finance - Accountancy and Financial Management | Accountancy and Financial Management - B Com PDF Download

Introduction

Finance is the lifeblood of business concern, because it is interlinked with all activities performed by the business concern. In a human body, if blood circulation is not proper, body function will stop. Similarly, if the finance not being properly arranged, the business system will stop. Arrangement of the required finance to each department of business concern is highly a complex one and it needs careful decision. Quantum of finance may be depending upon the nature and situation of the business concern. But, the requirement of the finance may be broadly classified into two parts:

Long-term Financial Requirements or Fixed Capital Requirement 

Financial requirement of the business differs from firm to firm and the nature of the requirements on the basis of terms or period of financial requirement, it may be long term and short-term financial requirements. Long-term financial requirement means the finance needed to acquire land and building for business concern, purchase of plant and machinery and other fixed expenditure. Longterm financial requirement is also called as fixed capital requirements. Fixed capital is the capital, which is used to purchase the fixed assets of the firms such as land and building, furniture and fittings, plant and machinery, etc. Hence, it is also called a capital expenditure.

Short-term Financial Requirements or Working Capital Requirement

Apart from the capital expenditure of the firms, the firms should need certain expenditure like procurement of raw materials, payment of wages, day-to-day expenditures, etc. This kind of expenditure is to meet with the help of short-term financial requirements which will meet the operational expenditure of the firms. Short-term financial requirements are popularly known as working capital.

Sources of Finance

Sources of finance mean the ways for mobilizing various terms of finance to the industrial concern. Sources of finance state that, how the companies are mobilizing finance for their requirements. The companies belong to the existing or the new which need sum amount of finance to meet the long-term and short-term requirements such as purchasing of fixed assets, construction of office building, purchase of raw materials and day-to-day expenses.

Sources of finance may be classified under various categories according to the following important heads:

1. Based on the Period -
Sources of Finance may be classified under various categories based on the period.
Long-term sources: Finance may be mobilized by long-term or short-term. When the finance mobilized with large amount and the repayable over the period will be more than five years, it may be considered as long-term sources. Share capital, issue of debenture, long-term loans from financial institutions and commercial banks come under this kind of source of finance. Long-term source of finance needs to meet the capital expenditure of the firms such as purchase of fixed assets, land and buildings, etc.
Long-term sources of finance include:

• Equity Shares
• Preference Shares
• Debenture
• Long-term Loans
• Fixed Deposits

Short-term sources: Apart from the long-term source of finance, firms can generate finance with the help of short-term sources like loans and advances from commercial banks, moneylenders, etc. Short-term source of finance needs to meet the operational expenditure of the business concern.
Short-term source of finance include:

• Bank Credit
• Customer Advances
• Trade Credit
• Factoring
• Public Deposits
• Money Market Instruments

2. Based on Ownership - Sources of Finance may be classified under various categories based on the period:
An ownership source of finance include

• Shares capital, earnings
• Retained earnings
• Surplus and Profits

Borrowed capital include

• Debenture
• Bonds
• Public deposits
• Loans from Bank and Financial Institutions. 

3. Based on Sources of Generation -
Sources of Finance may be classified into various categories based on the period

Internal source of finance includes

• Retained earnings
• Depreciation funds
• Surplus

External sources of finance may be include

• Share capital
• Debenture
• Public deposits
• Loans from Banks and Financial institutions

4. Based in Mode of Finance -
Security finance may be include

• Shares capital
• Debenture

Retained earnings may include

• Retained earnings
• Depreciation funds 

Loan finance may include

• Long-term loans from Financial Institutions
• Short-term loans from Commercial banks. 

The above classifications are based on the nature and how the finance is mobilized from various sources. But the above sources of finance can be divided into three major classifications:

• Security Finance
• Internal Finance
• Loans Finance