Page 38 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Objectives

After studying this unit, you will be able to:
 Identify the different long-term sources of finance
 Explain the different short-term sources of finance
 Describe leasing as a source of finance
 Discuss various significant aspects related to venture capital finance

Introduction
One of the most important element for an entrepreneur or company implementing a new
project or undertake expansion, diversification, modernization and rehabilitation scheme is
working out the cost of project and the means of finance. There are several sources of finance/
funds available to any company. Among the various sources of funds available to a company an
effective mechanism is required to evaluate risk, tenure and cost of each and every source of
fund. The selection of the fund source is dependent on the financial strategy pursued by the
company, the leverage planned by the company, the financial conditions prevalent in the
economy and the risk profile of both viz., the company as well as the industry in which the
company operates. Each and every source of funds has some merits and demerits.

3.1 Financial Needs and Sources of Finance of a Business

Financial needs of a business: The financial needs of a business may be grouped into following
three categories:

1. Long-term financial needs: Such needs generally refer to funds for a period exceeding 5 –
10 years. All investments in plant, machinery, land, buildings, etc., are considered as long-
term financial needs. Funds required to finance permanent or hard-core working capital
should also be procured from long-term sources.
2. Medium-term financial needs: Such requirements refer to funds for a period exceeding one
year but not exceeding 5 years. For example, if a company as part of strategy goes for
extensive publicity and advertisement campaign then such type of expenses, may be
written off over a period of 3 to 5 years. These are called deferred revenue expenses and
funds required for them are classified in the category of medium term financial needs.
Sometimes, long-term requirements, for which long-term funds cannot be arranged
immediately, may be met from medium-term sources and thus the demand of medium-
term finance is generated. As and when the desired long-term funds are made available,
medium-term loans taken earlier may be paid off.

3. Short-term financial needs: To finance current assets such as stock, debtors, cash, etc.,
investment in these assets is known as meeting of working capital requirements of the
concern. Firms require working capital to employ fixed assets gainfully. The requirement
of working capital depends upon a number of factors, which may differ from industry to
industry and from company to company in the same industry. The main characteristic of
short-term financial needs is that they arise for a short period of time, not exceeding the
accounting period i.e., one year.
The basic principle for meeting the short-term financial needs of a concern is that such needs
should be met from short-term sources, and for medium-term financial needs from medium-
term sources and long-term financial needs from long-term sources. Accordingly, the method of
raising funds is to be decided with reference to the period for which funds are required. Basically,
there are two sources of raising funds for any business enterprise viz., owner’s capital and

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