bac 412 notes - SOURCES OF FUNDS FOR ENTREPRENEURSHIP The...

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SOURCES OF FUNDS FOR ENTREPRENEURSHIP The sources and methods which a business enterprise will use to raise finance depend on the period for which funds are required. According to time period the financial requirements of business may be classified into three categories given below i. Long term finance: It is required for investment in fixed assets such as land, building, machinery, plant etc and for financing expansion programmes. Such finance is generally needed for a period of ten years or more. Shares, debentures, retained earnings and loans from financial institutions are the main sources of long term finance. ii. Medium term finance: It is required for investment in permanent working capital and for repayment of debts. It is raised for a period of more than one year and less than ten years. Redeemable preference shares, debentures, loans from financial institutions etc iii. Short term finance: It is required for purchasing working assets and for meeting day to day working capital needs of business. The main source of short term finance is trade credit. An enterprise requires finance to carry its business activities. An entrepreneur has to ensure proper utilization of funds in order to get maximum possible returns on funds invested. An entrepreneur requires i. Fixed capital to meet its fixed capital requirements such as purchase of land and building, plant and machinery replacement of old machines etc ii. Working capital to meet its working capital requirements such as rent, payment of salaries and wages, purchase of raw materials and other miscellaneous expenses. FIXED CAPITAL Fixed capital is used in investment of fixed assets. The amount of fixed assets owned or used by a business unit. The main features of fixed capital are as follows: i. Purchase of fixed assets : The fixed capital is normally used to purchase fixed assets. A part of the fixed capital is also used to meet promotional and development expenses incurred at the time of promoting and expanding the company. ii. Low liquidity : The fixed capital represented by fixed assets cannot generally be sold and encashed without spending considerable time and effort. 1
iii. Profit generation and capital appreciation : Fixed assets are the source of profits but they can never generate profit by themselves. Current assets are necessary to enable fixed assets to do so. Some of the fixed assets such as land do appreciate in value over a period of time. Other assets such as machinery depreciate over a period of time. iv. Source of risk : Fixed capital constitute the greatest source of risk for the investors’ money because they result in a recurring burden of overheads like depreciation, interest repairs and maintenance v. Permanent in nature : Fixed capital is more or less permanent in nature. It is generally not withdrawn as long as the company carries on its business. It can be withdrawn at the time of closure of the business by selling fixed assets vi. Sources : The sources of fixed capital are mainly shares, debentures and long term loans from financial institutions.

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