2. FINANCIALMANAGEMENTJithinOmanakuttan
INTRODUCTION
• The need for finance may be for long-term, medium-term or for
short-term.
• Financial requirements with regard to fixed and working capital
vary from one organisation to other.
• To meet out these requirements, funds need to be raised from
various sources.
• Sources like trade credit, cash credit, overdraft, bank loan etc.
which make money available for a shorter period of time are
called sources of short-term finance.
3. FINANCIALMANAGEMENTJithinOmanakuttan
SOURCES OF FUNDS
• Business simply cannot function without money, and the money
required to make a business function is known as business
funds.
• Throughout the life of business, money is required continuously.
• Sources of funds are used in activities of the business.
• They are classified based on time period, ownership and
control, and their source of generation.
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SHORT TERM FINANCE -
PURPOSES
• Meeting day to day financial requirements.
• Enables firms to hold stock of raw materials and
finished product.
• Goods can be sold on credit.
• More essential when, it is necessary to increase the
volume of production at a short notice.
• Required to allow flow of cash during the operating
cycle.
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SHORT-TERM SOURCES OF FUNDS
• Trade credit
• Bank credit
• Customer’s Advances
• Instalment credit
• Loans from co-operatives
• Indigenous bankers
• Factoring
• Accrued expenses
• Differed incomes
• Commercial papers
• Letter of credit
• Public deposits
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1. Trade Credit
• Suppliers are often amenable to working with their best
customers when they need to fund a large order to ramp
up a new contract or bridge a short-term need for
additional capital by extending payment terms.
• If we have greater relationship with the supplier or
vendors, it’s possible to negotiate payment terms to
accommodate the seasonality of your business.
9. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
(a) Loans and advances :-
• A certain amount is advanced by a bank repayable
after a specified period.
• Credited to a separate loan account and the borrower
has to pay interest on the whole amount.
• Usually loans are granted against security of assets.
10. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
(b) Cash Credit :-
• An arrangement whereby, banks allow the borrower to
withdraw money up to a specified limit.
• Limit is granted for one year (can be extended after review
for another year).
• If the borrower still desires to continue the limit, it must be
renewed after three years.
• Rate of interest varies depending upon the amount of limit.
• Banks ask for collateral security.
• Interest is charged only on the amount actually withdrawn
and not on the amount of entire limit.
11. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
(c) Overdraft :-
• An agreement with a bank by which a current
account-holder is allowed to withdraw more than the
balance to his credit up to a certain limit.
• No restrictions for limit.
• Interest is charged on daily overdrawn balances.
• Overdraft is allowed for a short period (temporary
accommodation).
• Cash credit is allowed for a longer period.
12. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
(d) Purchasing and Discounting of Bills :-
• The most important forum in which a bank lends without any
collateral security.
• The bank purchases the bills payable on demand and credits
the customer’s account with the amount of bills less
discount. At the maturity of the bills, bank presents the bill to
its acceptor for payment.
• In case the bill discounted is dishonoured by non-payment,
the bank recovers the full amount of the bill from the
customer along with expenses in that connection.
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3. Customer’s Advances
• Advances from customers and agents against orders.
• Cheap source of finance.
• In order to minimise their investment in working capital, some
firms having long production cycle, especially the firms
manufacturing industrial products prefer to take advance from
their customers.
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4. Instalment Credit
• Assets are purchased and the possession of goods is taken
immediately but the payment is made in instalment over a pre-
determined period of time.
• Interest is charged on the unpaid price or it may be adjusted in
the price.
• Used as a source of short-term working capital by many
business houses which have difficult funds position.
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5. Loans from Co-operatives
• Loan facility available through Co-operative banks.
• District Cooperative Banks are the federation of primary credit
societies.
• Bank activities are governed by RBI.
• Grant loans for personal as well as business purposes.
• Membership is the primary condition for securing loan.
• Functions of these banks are largely comparable to the
functions of commercial banks.
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6. Indigenous Bankers
• Loan facility through Commercial banks.
• Private money lenders and other Country Bankers lost their
monopoly.
• Today some business houses have to depend upon indigenous
bankers for obtaining loans to meet their working capital
requirements.
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7. Factoring
• Raising short-term finance is through account receivable credit
offered by commercial banks and factors.
• A factor is a financial institution which offers services relating to
management and financing of debts arising out of credit sales.
• Factors render services varying from bill discounting facilities
offered by commercial banks to a total take-over of administration
of credit sales.
• Factoring may be on a recourse basis, where the risk of bad debts
is borne by the client, or on a non-recourse basis, where the risk of
credit is borne by the factor.
• Factoring in India is rendered by only a few financial institutions on
a recourse basis.
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8. Accrued Expenses
• Such as accrued wages, taxes, and interest-represent liabilities for
services rendered to the firm that have not yet been paid for by the
firm. As such, they constitute an interest-free source of financing.
• The longer the payment- period of accrued wages , the greater is the
amount liability towards employees or the funds provided by them.
• Taxes are paid after collection and in the intervening period serve as
a good source of finance.
• Interest is also paid periodically while the funds are used
continuously by a firm.
• Accruals varies with the change in the level of activity of a firm.
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9. Differed Incomes
• Incomes received in advance before supplying goods or
services.
• Represent funds received by a firm for which it has to supply
goods or services in future.
• Funds increase the liquidity of a firm.
• Firms having great demand for its products and services, and
those having good reputation in the market can demand
deferred incomes.
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10. Commercial Papers
• A third source of short-term credit, consists of well-
established firms' promissory notes sold primarily to
other businesses, insurance companies, pension funds,
and banks.
• Issued for periods varying from two to six months.
• An important money market instrument in advanced
countries like U.S.A.
• In India, the RBI introduced commercial paper in the
Indian money market on the recommendations of the
Working Group on Money Market (Vaghul Committee).
21. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
• Only large companies enjoying high credit rating and
sound financial health can issue commercial paper (
satisfying eligibility conditions by RBI).
• Cheaper source of raising short-term finance.
• It cannot be redeemed before the maturity date even if
the issuing firm has surplus funds to pay back.
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11. Letter of Credit
• Popularly known as L/C.
• An undertaking by a bank to honour the obligation of its
customer up to a specified amount, should the customer fail to
do so.
• It ensures that there is no risk of non-payment.
• Simply a guarantee by the bank to the suppliers that their bills
up to a specified amount would be honoured.
24. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
(a)Clean L/C :-
• It is a guarantee for the acceptance and payment of bills
without any conditions.
(b) Documentary L/C :-
• It requires that the exporter’s bill of exchange be
accompanied by certain documents evidencing title to the
goods.
(c) Revocable L/C :-
• It is one which can be withdrawn by the issuing bank
without the prior consent of the exporter.
25. FINANCIALMANAGEMENTJithinOmanakuttan
Contd.
(d) Irrevocable L/C :-
• It cannot be withdrawn without the consent of the
beneficiary.
(e) Revolving L/C :-
• The amount of credit is automatically reversed to the
original amount after such an amount has once been paid
as per defined conditions of the business transaction.
• There is no deed for further application for another letter
of credit to be issued provided the conditions specified in
the first credit are fulfilled.
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12. Public Deposits
• The unsecured deposits invited by companies from the public mainly
to finance working capital needs.
• A company wishing to invite public deposits makes an advertisement
in the newspapers.
• It is raised directly from the public.
• This source has become very popular off late because companies
offer higher interest than the interest offered by banks.
• A company can accept deposits from the public to finance its
medium- and short-term requirements of funds.
• The acceptance of public deposits is regulated by the RBI.
28. FINANCIALMANAGEMENTJithinOmanakuttan
CONCLUSION
• Funding is the act of providing financial resources, usually in the
form of money, or other values such as effort or time, to finance
a need, program, and project, usually by an organisation or
company.
• Based on time period sources of funds are classified into long
term, medium term and short term.
• ST sources of fund essentially help business owners cover the
costs of growing their business.
• There are many types of short term sources of funds; trade
credit, cash credit, letter of credit, loans, deposits etc.