Basics of Finance

basics of finance
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Basics of Finance

Overview

In today’s economy finance is defined as the provision of money at the time it is required. It is the investment of assets and liabilities under the conditions of risk. Every organization may be big or small requires money to run and achieve its targets. A business aims to price assets on the basis of their risk levels, fundamental value and the return of rate expected. Finance is the art and science of managing money. It means the provision of money as and when required. The main financial function is the procurement of funds and to utilize them in the span of business.

Types of Finance

  • Business Finance:  Business finance is concerned with the funds required to manage a business. The term business can be categorized into 3 groups raising, providing and managing all the money used in connection with business activities.

According to Guthman and Dougall, business finance can be broadly defined as the activity concerned with planning, raising, controlling and administering of funds used in the business.

  • Public Finance: It is the study of the role of the government in the economy. The main objective of public finance is to generate revenue for the government so as to able to finance its activities. It helps the government regulate economic activities.
  • Private Finance: It is the method of providing funds for major capital investments, where private funds are contracted to manage and complete public projects.
  • Direct Finance: It is a method of financing where the borrowers borrow funds directly from the financial markets. There is no involvement of third-party services.
  • Indirect Finance: In this method of financing the concept of interest is involved. Here the financial intermediary takes the money from the lender with an interest rate and lends the money to a borrower.

Terms of finance & their sources

  • Longterm finance is the money required for more than 5 years, it can be for 10, 15, 20 years or more depending on business. Fixed assets like land, machinery, building etc. are funded using long-term finances. Long-term financial sources can be:
    • Equity shares/ capital
    • Preference shares/capital
    • Venture funds
    • Debentures/Bonds
    • Long-term loans from Banks
  • Mediumterm finance is for the time duration between 3 to 5 years. Such capital is required when there is a shortage of fund flow for long-term expenses and for some deferred revenue expense, which is to be written of within 3 to 5 years. Like advertising expenses. Medium-term financial sources can be:
    • Preference capital
    • Medium term loans
    • Financial Institutions
    • Government
    • Commercial Banks
    • Leasing
    • Hire Purchase Financing
  • Short-Term finance is the money required for the business to run its daily activities. Financing current assets of business like inventory, finished goods, debts. Its also called working capital finance. It’s usually required for a years time duration.
    • Creditors
    • Factoring Services
    • Working Capital from Banks
    • Payables
    • Advances received from Customers
    • Bill Discounting
    • Fixed deposits for a period less than 1 year

Types of funds in the organization

  • Owned Capital is also referred to as equity capital. Owned capital is sourced from the promoters or by issuing equity shares. Bringing in the required capital by the promoters start the business. Sources of owned capital:
    • Preference share
    • Equity Shares
    • Retained earnings
    • Convertible Debentures
    • Private Equity or Venture Funds
  • Borrowed Capital also know as debt capital is the funds accumulated from outside sources. These sources are:
    • Debentures
    • Financial Institutions
    • Commercial Banks

Sources of Capital

  • Internal source of capital is referred to the capital, which is generated within the business. Like:
    • Sales of Assets
    • Reduction of work capital
    • Retained earnings
  • External source of capital on other hand deals with the procurement of funds from outside the organization. Like:
    • Equity
    • Debt from Banks

The author of the article is Khushboo Chandarana.

 

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