FINANCE

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    Long Term Finances:

    1. Government:
    • Government lends for longer time period for businesses who are suffering
    • Convenient rules and regulations
    • Low interest
    • Flexible
    • Rare availability since government does not lend to every one

     

    1. Shares:
    • No need to repay them
    • No interest rate
    • More the share holders of a firm, more the sharing in profits

     

    1. Mortgages:
    • Sometimes businesses use their extra land or building as a guarantee for taking loans
    • The borrower agrees that incase of nonpayment the bank is allowed to take over the mortgaged property
    • High interest rate
    • Available to those only who have extra property to be mortgaged
    • Inflexible time period
    • Business is safe in case of non payment

     

    1. Loans:
    • Low interest rate
    • Not available for small businesses
    • Only for large businesses who are well established
    • Inflexible time period
    • Money cannot exceed the defined limit

     

    1. Debentures:
    • Temporary securities issued by Public Limited Companies
    • The person who buys the debenture gets a fixed interest
    • PLC’s reserve the right to buy back the debentures after a finite time period, after paying interest
    • Issued to the general public
    • PLC’s formulate the rules themselves

     

    1. Sale and Lease Back:
    • If a firm is short of money, it can sell off its fixed assets e.g. building
    • Thus it will immediately get a large sum of money in hand
    • It can then lease back that building
    • This way it will have to pay a small amount as rent every month and remaining money could be used for further purposes

    Mid Term Finances:

    1. Over Draft:
    • An agreement to allow a customer to withdraw cheques when necessary, which will put his account to debit
    • The amount up to which he can withdraw is decided earlier
    • High rate of interest
    • Interest charged on daily basis
    • Short term loan – for a few days
    • In case of nonpayment, bank has to go for legal methods
    • Less formalities – no need to fill forms etc

     

    1. Factoring:
    • Businesses sell their assets e.g. extra building
    • No interest
    • No pay back
    • Decreases assets of firm – sense of insecurity

     

    1. Hire Purchase:
    • After paying a small amount as down payment, customer can pay the remaining amount in installments
    • 3rd party is involved which buys the product from the manufacturer and gives it to the customer on credit
    • In case the customer fails to pay on time, the goods are repossessed
    • Suitable for durable capital goods such as vehicles

     

    1. Trade Credit:
    • Borrowing goods on credit from seller and delaying the payments with interest – no 3rd party involved
    • In case of nonpayment, goods cannot be repossessed so legal procedures have to be applied
    • Ownership and possession both lie with the borrower
    • Interest has to be paid

     

    Self Financing:

     

    1. Retained Profits:
    • Usually firms retain 10% of their profits
    • No interest has to be paid
    • No need to pay back money
    • Not a very large amount
    • Sense of insecurity once retained profits have been used
    1. Savings:
    • All what a person has saved throughout in life
    • No interest
    • No need to pay back
    • Not a very large amount
    • Sense of insecurity once savings have been used

     

    1. Friends and Family:
    • Money is borrowed from friends and family
    • No interest
    • Flexible time period
    • Unreliable and undocumented
    • Only small sum of money available

    Business Finance:

    • Capital:

     

     

    Fixed                                                                  Working

     

    Part of the capital of a firm                                 amount of capital used

    tied up in the form of fixed                                 to meet day to day

    assets e.g. building                                                expenses of firm such

    Stationery

     

    • Turnover:
    • The total value of goods sold in a year
    • Turnover = gross sales – goods returned – allowance
    • Rate of turnover or rate of stock turn is the number of times the average stock can be sold off

     

    • Profit:

     

    Gross Profit                                                                        Net Profit

    Over all profits on trading                                   true profit obtainable from trading

    Gross Profit = net sales – cost of                        Net Profit = Gross Profit – expenses                              goods sold