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Adv.F.M. Source of Finance Sem-4-1
Adv.F.M. Source of Finance Sem-4-1
SOURCES OF FINANCE
MASTER OF COMMERCE
ACCOUNTANCY
SEMESTER IV
2016-2017
SUBMITTED BY
AASHISH GAUD
Roll No. : 37
UNDER THE GUIDANCE OF
ASST PROF. SUJATA GADA.
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Sheth T.J. Education Societys,
SHETH N.K.T.T. COLLEGE OF COMMERCE & SHETH
J.T.T. COLLEGE OF ARTS, THANE (W)
CERTIFICATE
OF
PROJECT WORK
This is to certify that,
Kumar. Aashish Gaud M.Com (Accountancy) Semester-IV Roll No:37 has undertaken &
completed the project titled SOURCES OF FINANCE during the academic year 2016-17
under the guidance of Asst Prof. SUJATA GADA submitted on / / 2017 to this college in
fulfillment of the curriculum of
MASTER OF COMMERCE
UNIVERSITY OF MUMBAI.
This is a bonafide project work & the information presented is true & original to the
best of our knowledge & belief.
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ACKNOWLEDGEMEMT
This project bears all those who directly or indirectly helped and extended their
kind support in completing this project.
I met during the course of this project, for their support and for providing
valuable information which help me to complete this project successfully.
At this moment I also almighty God for the blessing showed upon me, my
parents for their support and care and also my friends for their valuable Suggestions.
This project report is a collective effort of all and I sincerely remember and
acknowledge all of them for their excellent help and assistance throughout the
project.
College name: Sheth N.K.T.T. College of Commerce & Sheth J.T.T. College of Arts,
Thane.
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DECLARATION
I, AASHISH GAUD hereby declare that the project report entitle SOURCES OF
FINANCE under guidance of ASST PROF. SUJATA GADA submitted in partial
fulfillment of the Degree of M.Com(Accountancy) to Mumbai University is my original
work.
Signature:
Date: / / 2017
Place: Thane
INDEX OF CONTENT
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Sr. No. Title Page
No.
1. Introduction 06
2. Source of Finance 07
3. Different Source of Finance 15
4. Advantages & Disadvantages 17
of SOF
5. Choosing an appropriate SOF 27
6. Impact of Several Source of 30
Finance
7. Different Decision Makers 32
8. Financial Planning 34
9. Singer ( Sri Lanka) PLC 35
10. Conclusion 38
11. References 39
1.0 Introduction
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This is an informative and analytical report on Sources of finance.
The report is written as an assignment of Managing financial resources
and decision module of the first semester for the evaluation of our
understanding and knowledge of the sources of finance to the lecturer
Mrs. Sujata. This assignment also tests our knowledge on choosing the
appropriate source of finance and financial planning. The report also
provides analysis of Singer (Sri Lanka) PLCs balance sheet for sources of
finance. All of the information and research for this report is through the
World Wide Web.
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2.0 Sources of Finance
Internal sources of finance are the funds readily available within the
organisation. Internal sources of finance consist of:
Personal savings
Retained profits
Working capital
Sale of fixed assets
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shareholders. The remainder of the profits after all payments are made for
a trading year is known as retained profits. This remainder of finance is
saved by the business as a back-up in times of financial needs and maybe
used later for a companys development or expansion. Retained profits
are a very valuable no-cost source of finance.
Working capital refers to the sum of money that a business uses for
its daily activities. Working capital is the difference of current assets and
current liabilities (i.e. Working capital = Current assets Current
liabilities). Proper working capital management is also vital as it is also a
source of finance for a business.
Current assets
Current assets are also known as cash equivalents because they are
easily convertible to cash. Current assets consist of Stock, Debtors,
Prepayments, Bank and Cash. These assets are used up, sold or keep
changing in the short run.
Stock this refers to the stock of goods available to the business for
sale at a given time. It is very important to maintain the right amount of
stock of goods for a business. If stock levels are too high it means that too
much of money is being held up in the form of stock and if stock levels are
too low the business will lose possible opportunities of higher sales.
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Bank and Cash Bank is the cash held in banks and cash is money
held by the business in the form of cash. Having too much of money in the
form of cash is also not good for a business since it can use that money to
invest and earn a return but however a business should have healthy
current ratio (current assets : current liabilities) of 2:1.
Current liabilities
Dividends proposed are the dividends payable for the year that is
not yet paid.
Fixed assets are the assets a company that do not get consumed in
the process of production. Some examples of fixed assets are land and
building, machinery, vehicles, fixtures and fittings and equipment.
Sometimes where the fixed asset is a surplus and is abandoned, it can be
sold to raise finance in demanding times for the business. Otherwise
businesses may choose to stop offering certain products and sell its fixed
assets to raise finance. Selling fixed assets reduces the production
capacity of a business affecting a businesss return.
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2.2 External sources of finance
Ownership capital or
Non-ownership capital
o Ordinary shares
o Preference shares
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ownership capital source of finance. There are several types of preference
shares. Some of them are Cumulative preference share, Redeemable
preference share, Participating preference share and Convertible
preference share.
o Debentures
o Bank overdraft
o Loan
o Hire-purchase
o Lease
o Grant
o Venture capital
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o Factoring
o Invoice discounting
2.2.2.1 Debentures
Floating debentures do not have fixed rate of interest and are not tied to
any specific asset.
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more money than their bank account balances hold. Interest has to be
paid on the amount overdrawn. Bank overdraft is the ideal source of
finance for short-term cashflow problems.
2.2.2.3 Loan
2.2.2.5 Lease
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Finance Lease this is where the lessees monthly payments add up
to at least 90% of the total value of the asset.
Operating Lease this lease does not run for the full life of the asset
and the lessee is not liable for the full value of the asset. The residual risk
is taken up by the lessor.
2.2.2.6 Grant
2.2.2.8 Factoring
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Recourse factoring In this type of factoring the client company is
liable for bad debts.
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3.0 The financial costs of the different sources of
finance
Personal savings have low costs since they are provided by an owner,
partner or shareholder. The owner may charge a rate of interest for the
loan provided.
Retained profits have opportunity cost, that is the money could have
been used elsewhere for some other purpose. Otherwise there arent any
other costs for this source of finance.
Working capital they do not have any costs other than opportunity
cost.
Sale of assets by selling fixed assets it uses then the firms production
capacity will diminish. If it sells unused or abandoned fixed assets then
only the potential production capacity reduces. Sometimes firms will have
to stop offering certain products or services in order to sell its asset and
raise finance. The asset may cost much more than what it sold for if it
wants to replace it.
Bank overdraft interest is a little higher than for bank loans and
interest is calculated on a daily basis.
Loans Interest is usually fixed for short term loans, and long-term loans
usually have a variable rate of interest. Interest rates are lower than for
bank overdrafts.
Lease the ownership of the asset remains with the leasing company
even after the business pays more than 90% of the assets value but
however some leasing firms provide the option of purchase of the asset a
nominal value.
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Grants are free and have no financial costs.
Venture capital the venture capitalist will have some influence over
the business and the business will have to share profits with the investor.
The investor will want the capital back at a later date.
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4.0 Advantages and Disadvantages of the different
sources of finance
Advantages
The owner would not want collateral to lend money to the business.
The money need not necessarily be paid back to the owner on time.
Can be interest free or carry a lower rate of interest since the owner
provides the loan.
Disadvantages
Advantages
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The companys debt capital does not increase and thus gearing
ratio is maintained.
There are no costs raising the finance such as issuing costs for
ordinary shares.
Disadvantages
Advantages
No repayment is needed.
Disadvantages
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Total risk is undertaken by the company.
Advantages
Funds are again raised by the business itself and therefore need not
be paid back.
No interest payments are required.
Large amounts of finance can be raised depending on the fixed
asset sold.
Would be the ideal source of finance if it was for an asset
replacement.
Disadvantages
If the asset is sold and the money is spent without return then the
business is broke.
The asset may be able to generate more income than the purpose it
was sold for.
Advantages
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Able to raise large amounts of finance.
If the company follows a rational dividend policy it can create huge
reserves for its development program.
The dividends need to be paid only if the company makes a profit.
No collateral is required for issuing shares.
It will help reduce gearing ratio
Disadvantages
There are legal and regulatory issues to comply with when issuing
shares.
Once issued the shares may not be bought back and therefore the
capital structure cannot be changed.
Advantages
Have no voting rights and thus the management can retain control
over the affairs of the company.
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Even if the company makes large profits preference shareholders
need to be paid only a fixed rate of interest.
Disadvantages
Even if the company makes a very small profit it will have to pay the
fixed rate of dividend to its preference shareholders.
Preference shares are usually cumulative and thus twice the amount
must be paid the following year if dividends are not paid on the year
they need to be paid.
4.7 Debentures
Advantages
Disadvantages
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Debenture interests have to be paid regardless the company makes
a profit or loss.
Advantages
Disadvantages
Overdrafts are meant to cover only short-term financing and are not
a permanent or long-term source of finance
4.9 Loans
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Advantages
Need not be paid back for a fixed time period and banks do not
withdraw at a short notice.
Interest rates are lower than for bank overdrafts and are set in
advance.
Disadvantages
Collateral is needed.
Interest is charged.
Advantages
The business gains use of the asset before paying the assets value
in full.
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Payments can be made from the assets usage and return of the
asset.
Disadvantages
Ownership remains with the lender until the last payment is made.
The asset will cost the company more than the original value.
If payments are not made on time the lender has the right to
repossess the asset.
4.11 Lease
Advantages
The amount in full need not be paid in order to start using the asset.
The total cost and the lease period is pre-determined and thus helps
with budgeting cashflow.
Lease is inflation friendly where the agreed rate is paid even after
five years when other costs increase due to inflation.
Disadvantages
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The ownership of the asset remains with the lessor even after
payments but however in a finance lease the option is provided to
buy the asset at a nominal value.
In a finance lease the lessee ends up paying more than the value of
the asset.
4.12 Grants
Advantages
Disadvantages
Grants are given freely and therefore are very competitive because
lots of firms try for the same source of fund.
Advantages
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They may also bring a lot of experience and expertise along with
the money.
Disadvantages
4.14 Factoring
Advantages
Disadvantages
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The business has to pay interests and fees for the factor for its
services.
Advantages
Disadvantages
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5.0 Choosing an appropriate source of finance
There are many sources of finance available to a business. Finance
is needed for several purposes and different purposes need sources of
finance which are most suitable to them. When choosing an appropriate
source of finance some factors have to be considered.
For example borrowing a commercial loan for a small and short-term cash
flow problem is unwise because loans may have a minimum amount that
can be borrowed so taking a bank overdraft would be wise where money
can be borrowed in small sums and bank overdrafts can be paid back
quickly. Therefore the amount of money required is a key factor in
choosing a source of finance.
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This refers to the amount of time the business can spend on collecting
funds. If the business has plenty of time before its financial needs need to
be met then it can spend time searching for cheap alternatives of sources
of finance. On the other hand if the business wants the money as soon as
possible then it would have to make some cost sacrifices and accept a
source of finance that may even cost higher. The urgency of funds needs
to be identified also because certain sources of finance need more time to
be raised than other sources of finance.
For example issuing shares is a very long and complex process where
there are legal requirements and then the potential shareholders have to
be informed (advertising) and after all these the money is collected
through the process of application and allotment which takes more time.
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The gearing ratio plays an important role in the availability of the sources
of finance since the gearing ratio shows the ratio of debt capital to the
total capital of a business. If a business is high geared then commercial
lenders will be unwilling to give loans because the business is already
operating on more loans than equity capital. A high geared company will
have to pay more of its profits as interests on loans and other debt
capital. That being the case potential lenders fears the business ability to
be able to cope with more interest payments and debt settlement.
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6.0 The impact of several sources of finance on the
financial statements
Financial statements keep record of a businesss trading year (Trading,
profit and loss account) and show the financial position of a business as at
a date (Balance sheet). Obtaining finance from different sources bring
about a change in the financial statements. This portion of the report
investigates how each source of finance is recorded and affects the
financial statements.
Personal savings
Personal savings when lent to the business are considered as loans. The
amount lent will appear as Long-term liabilities on the balance sheet. If
any interest payments are to be made they will be recorded in the profit
and loss account and charged against profits.
Sale of assets
Sale of assets will reduce the value of fixed assets on the balance sheet.
The profit or loss made on the sale of asset will be recorded in the profit
and loss account for the year. The depreciation of the asset along with its
original price will be removed from the balance sheet.
The issue of ordinary shares and preference shares increase the vale of
equity capital in the balance sheet. If the issued shares market price is
greater than the nominal value of the share then share premium is also
increased in the balance sheet. The number of shares issued is also
displayed in the balance sheet and for preference shares the rate of
dividend is also shown. The dividends paid to the shareholders are
recorded in the appropriation account after tax is deducted from net
profit.
Debentures
Debentures are a type of debt capital. The value of debentures along with
the rate of interest and the repayment date is presented in the equity and
liabilities section of the balance sheet. The interest paid on debentures is
reduced from profits before tax is charged.
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Bank overdraft
Loan
Loans are long-term debts and therefore come under long-term liabilities
in a balance sheet. The loan when displayed on a balance sheet will
usually contain information about the repayment date and the interest
charged on the loan. The interest is charged in the profit and loss account.
Venture capital
This does not appear in the balance sheet. However the money received
from factoring and invoice discounting can show higher balances of cash.
The interest charges and fee is recorded in the profit and loss account.
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7.0 The information needs of different decision makers
Different decision makers will want different information about the
company regarding their interests in the business. A long-term lender will
always want to know the gearing ratio of a company while the short-term
lender will want to know about the liquidity ratio of the business. The
information for different parties is all taken from financial reports,
cashflow and financial statements such as the balance sheet and profit
and loss account. The manager needs accounting information to take
managerial decisions since all functions of an organisation are tied to the
financial strength of a business. Using the financial statements, the
financial stability and profitability of an organisation can be analysed and
interpreted. Using this information the interested parties make decisions
regarding the business.
Ratio analysis
The ratio shows the relationship between two relevant items in the
financial statement. The relationship is shown as a ratio or as a
percentage. Different ratios calculable on a businesss financial
statements are:
Liquidity ratios
o Current ratio
Profitability ratios
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o Gross profit margin ratio
o Debt/Asset ratio
o Dividend yield
o Price-Earnings ratio
o Interest yield
o Redemption yield
The above ratios being calculated the performance of the business can be
assessed and necessary decisions can be taken by relevant parties. Due
to limited time the ratios have not been explored in detail.
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8.0 Financial planning
Importance of financial planning
Financial planning affects the terms and conditions on which the business
will be able to obtain funding required to establish, maintain and expand
the business. Financial planning influences the raw material a business is
able to afford, the products it is likely to produce and whether the
business will market its product efficiently. It will affect the resources the
business is able to acquire to operate and it will be a major determinant of
the success of the business.
A financial plan not only help the business to understand what it wants to
do but also helps the business understand how to achieve it.
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9.0 Singer (Sri Lanka) PLC
Singer is a public limited company that was established in 1877. Today
Singer is a large, diversified company unlike any other in Sri Lanka. It is a
member of the worldwide franchise Singer. Beginning with sewing
machines, Singers product portfolio consists of a range of household,
industrial and financial categories.
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9.1 Identifying sources of finance in Singer (Sri Lanka)
PLCs balance sheet.
Fixed or Non-current assets that can be sold are potential sources of
finance that is categorised as sales of assets
o Property, Plant and Equipment = LKR 1,419,011,146
Working capital is current assets minus current liabilities
o Working capital (7,855,964,730 6,302,249,382) = LKR
1,553,715,348
Retained earnings are the accumulated earnings of a company
o = LKR 373,951,178
Share capital
o = LKR 629,048,050
Loans and borrowings
o = LKR 1,383,661,616
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10.0 Conclusion
Sources of finance is available from variety of sources but each source
has its own cost and benefits. It is important to choose an appropriate and
cheap source of finance for the smooth operation of the firm. There are
important factors to consider when choosing a source of finance. However
further work need to be done. The limitedness of time has not allowed for
further research and more detail.
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11.0 References
1. https://efinancemanagement.com/sources-of-
finance/sources-of-finance
2. http://www.bbc.co.uk/schools/gcsebitesize/business/financ
e/sourcesoffinancerev2.shtml
3. http://www.fao.org/docrep/w4343e/w4343e08.htm
4. https://www.slideshare.net/anchalkesari/sources-of-
finance-13947839
5. https://www.extension.iastate.edu/agdm/wholefarm/html/c
5-92.html
6. http://startups.co.uk/business-finance-6-sources-of-
finance-for-a-business/
7. http://www.business.vic.gov.au/money-profit-and-
accounting/raising-funds-for-your-business/sources-of-
finance
8. https://www.tutor2u.net/business/reference/sources-of-
finance-for-a-startup-or-small-business
9. https://www.forbes.com/forbes/welcome/?
toURL=https://www.forbes.com/2010/07/06/best-funding-
sources-for-small-business-entrepreneurs-finance-dileep-
rao.html&refURL=https://www.google.co.in/&referrer=http
s://www.google.co.in/
10. http://www.bbamantra.com/long-term-sources-of-finance/
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