CAPITAL- FIXED AND WORKING
Definition of Business finance:-
Business finance refers to the money and
credit employed in business firms. It is
that aspect of business which is concerned
with the arrangement of cash and credit
so that business firms may, at all times,
have the means to carry out their
operation smoothly.
Nature of Business finance:-
1. Includes all types of capital or
funds used in business.
2. Needed in all types of business –
large or small, manufacturing or
trading etc
Financial planning:-
Financial planning is the process of
estimating the financial requirements of
an organisation, choosing the sources of
funds and deciding how the funds are to
be utilised.
Features-
1. involves deciding when, how and why of
financial activities.
2. is future oriented and involves
forecasting.
3. involves deciding objectives, policies,
procedures, methods and programs
concerning funds.
WORKING CAPITAL:-
Means the capital invested in working
assets or current assets. Required for the
day-to-day operations of an enterprise.
also known as circulating capital or
revolving capital because it is invested,
recovered and reinvested repeatedly.
Gross working capital= book value of
current assets
Net working capital= current assets-
current liabilities
Types of working capital:-
permanent temporary
WC WC
inital Seasonal
WC WC
Regular Special
WC WC
Factors affecting working capital:-
i. Nature of Business:
Manufacturing firms require
more working capital but public
utility undertakings require less
working capital as they do not
have to maintain inventory.
Importance of Business finance:-
1. can meet its liabilities in time
2. take advantage of operations
3. increases efficiency
4. carry on its business smoothly
5. can replace its plant and machinery in
time
6. can face recession, trade cycles and
other crises
7. enjoy goodwill or reputation
8. bridge gap b/w production and sales
9. to pay wages, salaries on time
10. determines size and scale of
operations
Importance of financial planning:-
1. Helps a business enterprise to
avoid the problems of shortage
and surplus of funds
2. Serves as a guide in developing a
sound capital structure so as to
maximise returns to shareholders
3. Planning helps in effective
utilisation of funds and wastage
of capital is eliminated.
4. Provides policies and procedures
for coordinating
5. Enables the management to
exercise effective control over
the financial activities
6. Prepare for facing business
shocks and surprises in future.
FIXED CAPITAL:-
Refers to the funds required for acquisition
of fixed assets. meant for generating
income. used permanently for business
operations. Also known as ‘block capital’
because it is blocked up in fixed assets for
the life time of the enterprise
Factors affecting fixed capital:-
i. Nature of Business:
Manufacturing enterprises
require heavy investment in fixed
assets such as land and buildings
and plant and machinery. But
trading concerns require less
investment in fixed capital.
ii. Size of the Business: A large-
sized enterprise requires a
greater amount of fixed capital
than a small scale firm
iii. Nature of Products: . A company
manufacturing capital goods will
require a large amount of fixed
capital And a firm producing
consumer products will need
Sources of Business finance:-
1. Sole proprietorship- Owner’s capital,
retained profits, loans from relatives,
friends, banks, financial institutions,
credit from suppliers
2. Partnership- Owned capital
contributed by partners, Retained
profits, Loan from commercial banks
and financial institutions, Short term
loans from suppliers
3. Joint stock company- Issue of shares,
Retained profits, Bonds and
debentures, Long term loans and
Short term loans financial institutions
and commercial bank
Factors affecting capital structure:-
Capital Structure means the proportion of
owner’s fund and borrowed fund in the total
fund of the business. The ratio between equity
(owned funds) and debt (borrowed funds) is
called capital gearing or financial leverage. High
gearing or trading on thin equity means
proportion of debt is high; Low gearing or
trading on thick equity means proportion of
equity is high.
i. Trading on Equity (Financial Leverage):
When a company uses borrowed funds
in the regular conduct of business
along with equity capital it is said to be
trading on equity.
ii. Exercise of Control: If the promoters of
the company want to retain control in
their own hands, they may not issue
additional equity shares to the public.
iii. Need for Flexibility: Debentures and
preference shares can be paid off
whenever the company feels
necessary. But equity shares cannot be
paid off during the life-time of a
company.
iv. Nature of Business: enjoying regular
and liberal earnings, e.g., public
utilities can afford to have high capital
gearing (more loans).
v. Cost of Financing: Normally, the cost of
debt is lower than that of equity.
vi. Period of financing: permanent
investment equity shares are the
appropriate choice. Debentures and
preference shares are preferable for
medium-term finance.
vii. Capital Market Condition: During
boom investors are willing to take risk
and invest in equity shares. But in a
bearish market, or down swing
investors prefer safe investment.
viii. Statutory Requirements: The
Companies Act and SEBI guidelines
 ii. Size of Business: Firms carrying
on large-scale operations and
undertaking high volume of
production require more working
capital than small-scale firms.
iii. Manufacturing Cycle: Longer is
the time gap between the
purchase of raw materials and
production of finished goods,
higher is the need for working
capital.
iv. Rapidity of Turnover: When the
turnover is rapid, the amount of
working capital required is small
and vice versa
v. Terms of Purchase and Sale:
business firm requires
comparatively small amount of
working capital if it buys on
credit and sells in cash, whereas,
if it purchases in cash and sells
on credit, larger amount of
working capital will be required.
vi. Credit Policy: liberal credit policy
needs more working capital
,whereas , smaller working
capital is needed in case of a
tight credit policy.
vii. Operating Efficiency: Better
utilisation of resources leads to
reduction in costs and improves
profitability so need for working
capital is reduced.
viii. Goodwill of Business: good
reputation requires a less
amount of working capital as can
easily and quickly obtain short-
term loans from banks.
small amount of fixed capital must be observed while raising funds
iv. Method of Production: capital- from the public. Thus, state regulations
intensive techniques of regarding the issue of securities have
production such as automatic a bearing on capital structure.
machinery requires higher
amount of capital as compared
to a company employing labour-
intensive
v. Diversity of Product Lines: A
multi-product company
manufacturing diversified
products requires more fixed
capital than a firm manufacturing
a single product.
vi. Mode of Acquiring Fixed Assets:
Firm purchasing fixed assets on
cash down basis requires huge
amount of fixed capital. On lease
or hire purchase will need less
fixed capital.
vii. Intangible Assets: The amount
invested in acquiring goodwill,
patents, copyrights, etc., also
influence the amount of fixed
capital needed for business.