 Hello everyone, welcome to KKNDX Theropan University. In this session we will discuss the second unit of financial management of become second semester and the name of the unit is sources of business finance. The discussion will cover the meaning of business finance. Then we will discuss various sources of business finance, then various methods of raising short term fund and then various methods of raising long term fund. As we discussed in the last discussion that finance is the most essential factor for any business activity. In some way or other, every sphere of business is related to finance. A business of any form and kind requires finance for its smooth operation. A business enterprise requires capital for various purposes such as for acquiring fixed asset, for acquiring current asset, for acquiring intangible asset, for paying the establishment expenses, for financing expansion and diversification of the business to meet the working capital requirement etc. So the total financial requirement of a business can be divided into the following way. Number one is the fixed capital requirement. So what we mean by fixed capital? So fixed capital is that portion of capital which is used in procuring fixed assets such as land and building, plant and machinery, furniture etc. And investment in these fixed assets calls for long term financial requirement. So to finance this asset we need to procure fund from long term sources. Then again there is working capital requirement which is also called circulating capital or revolving capital. So what is working capital? Working capital is that portion of capital which is used for holding current assets such as stock, bills receivable and cash for meeting day to day expenditures on salary, wages, rent, commission, advertising expenses etc. So now in this case for financing working capital we need some short term sources of fund. So for financing fixed asset we need long term sources and for financing working capital we need short term source of capital. Now on the basis of period for which fund is required the company determines the source through which funds can be raised. Business may require fund for long term, medium term and short term. Now if we talk about the sources of fund then what are the sources of long term finance? When a business raise funds for more than five years then it is called long term fund requirement or long term fund. Long term fund is required for acquiring fixed asset, expansion of business etc. Now the source employed for procuring such long term funds are equity shares, preference shares, dividend shares, loan from financial institutions and retainer. So these are the source from which we can procure long term fund. Then the business require some medium term fund. So what is medium term fund? Funds which are raised for more than one year but less than five years period that is called medium term fund and these funds are used for introduction of new product, for upgradation of technology, investment in working capital etc. Now what are the source we can employ or what are the source we can use for financing medium term financial requirement. We can use divenser, we can use public deposit, we can take loan from banks and we can use lease financing. So these are the sources of medium term finance. Then we need funds for short term period. So when the fund is raised for a maximum period of 12 months that is one year that is called short term fund. Short term funds are required in a business for meeting day to day expenditures like payment of salaries, payment of wages, payment of trade creditors etc. And the various source from which short term funds can be raised are cash credit, overdraft, discounting of veal, commercial papers etc. Now we will discuss some sources of long term finance. So the first important source of long term funds for any business is equity shares. The equity shares is the source for permanent capital for a company. Equity shares are those which do not impose any obligations on the company to pay a fixed rate of dividend to the holders. Equity shares gives footing right to its holders. Equity share holders are the actual owners of a company who have control over the workings and management of the company and therefore it is also called the owners fund. Dividend is paid on equity shares on the recommendations of the board of directors. The rate of dividend paid to the equity shareholders depends on the profit of the company. More profit to the company means more dividend to the equity shareholders and less profit to the company means less dividend to the equity shareholders. But some company may pay dividend even if there is no profit to maintain the dividend stability out of its revenue. So it is not always like that. Sometimes even if there is no profit then also a company may give dividend to the shareholders out of its reserve. Now there are certain benefits of raising funds by swing equity shares. Like equity share is the stable and permanent source of capital for a business. Capital raise through equity shares can be used throughout the life of a company since the company need not redeem equity shares. Then the next is equity shares do not impose any kind of liability over the company to pay fixed rate of dividend to the equity shareholders. So the company is free to determine the rate of dividend to be offered to the equity shareholders. Then asset of company are not mortgaged for raising funds by the equity shareholders. So when a company raise capital by issuing equity shares, the company need not create any shards over the assets. So assets remain free. The next is since equity shares is owners fund equity capital increase the credit worthiness of the company and increase the confidence of the lender and thereby the company can go for taking loans from the financial institutions. Now though raising capital by issuing equity shares has many merits but it has some demerits also. Like the cost of raising equity capital is not fixed and it is generally high compared to other sources of finance. Next from the investor's point of view equity shares never ensure them a regular or stable dividend. So the return sometime may be high sometime may be low. So there is no guarantee of return. Next issue of additional equity shares dilute the control and power of existing equity shareholders. So when more equity shares are issued the control and power of the existing equity shareholders are diluted. Next investment in equity shares do not give tax advantage to the equity shareholders because dividends are not tax exempted. So that is why from investor's point of view it is not very much preferable. Next source for long term capital is preference share. So what is preference share? According to section 85 one of the company's act a preference shares are those shares which carry preferential rights as the as to payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. So there are two preferential rights given to the preference shareholders by the company's act. Number one is preference in payment of dividend they will get a preference over the equity shareholders and number two preference in repayment of capital in case of winding up of the company. The rate of dividend on preference here is fixed and a dividend on these shares must be paid before any dividend is paid to the ordinary shareholders. Now there are some merits of issuing preference here like from the investor's point of view they get a fixed return. The dividend payable to preference shares is fixed that is easily lowered in the equity shareholders and thus it helps the company in maximizing the profits available for dividend to the equity shareholders. The next is no voting rights preference shareholders have no voting right on matters not directly affecting their right and hands promoters or management can retain control over the affairs of the company. Then no burden on finance issue of preference shares does not impose a burden on the finance of the company because dividends are paid only if profits are available otherwise no dividend is paid. Then no surge on assets no payment of dividend on preference shares does not create a surge on the assets of the company. So if a company fail to pay dividend that will not create any surge over the asset of the company. Now there are certain demerits of preference shares what is what the dose number one is higher rate of dividend. A company is to pay a higher rate of dividend on preference shares then the prevailing rate of interest on dividend shares are bonds and it usually increase the cost of capital for the company. Then financial burden most of the preference shares are issued cumulative which means that all the area of the preference dividend must be paid before anything can be paid to the equity shareholders the company is under obligation to pay the dividend to preference shareholders. Next dilution of claim over assets the issue of preference shares involves dilution of equity shareholders claim over the assets of the company because preference shareholders have the preferential right on the assets of the company in case of winding up. So if a company winds up in that case always the preference shareholders will get a preferential right over the asset of the company. Next adverse effect on credit worthiness so issue of preference shares adversely affect the credit worthiness of a company. Preferential capital has the preferential right over payment of dividend if the company avoids payment of dividend it adversely affects the credit worthiness of the company. Next no tax advantage the taxable income is not reduced by the amount of preference dividend while in case of divisors or bonds the interest paid on dame is deductible in full.