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Small Scale Industries – 5 Capital Structure Finance is the Life Blood of any business.

Its management is an art and calls for special attention. In most of the organizations, finance is handled by Chartered ccountants. !he company"s gro#th depends upon the proper maintenance of financial accounts. !he financial function of management is to – • • • • $nsure a fair return on in%estment &enerate and build up surplus and reser%es for gro#th and e'pansion (lan, direct and control the utilization of finances so as to ensure the ma'imum efficiency of operations of operations and build a proper relationship #ith suppliers, financiers, #or)ers and members. Co*ordinate the operations of the %arious departments through appropriate measure to ensure discipline in the use of financial resources.

!he term capital refers to the total in%estment of money, tangible assets li)e buildings, etc., and intangible assets li)e good#ill. It is the total #ealth of a unit or a company. !he net capital refers to the e'cess of total assets o%er total liabilities. Capitalisation: Capitalisation is the sum total of all long term securities issued by a company and the surpluses not meant for distribution – includes only term loans and retained profits. If a company raises more capital than is re+uired by the figure of capitalization or its earning po#er, it is said to be o%er capitalized, but if its capital is lo#er than its earning po#er, it is said to be under capitalized. $ffects of ,%er Capitalisation- s a result of o%er capitalization – .. !here is considerable reduction in the rate of di%idend on e+uity shares /. !he mar)et %alue of shares declines and in%estors lose confidence in the company 0. !he company results to #indo# dressing 1. !here is lo# of good#ill. 5. It is indication of reduced efficiency 2. 3esults in a mis*appropriation of the society"s resources 4. Leads to a cut in the #ages of #or)ers #ith a %ie# to raising profits 5. 6a)es it difficult for a company to #ithstand competition 7. Shareholders recei%e lo# di%idends. .8. 9epreciated shares are sub:ect to gambling on stoc) e'change ... Scope for remedial measures or reorganization. Under Capitalisation company is under capitalized #hen its capital is lo#er than #arranted by its earning capacity. !he management should capitalize its earnings by issuing fully paid up bonus shares. Fle'ibility in financial planning is therefore +uite essential if the capital structure is to be ad:usted to the %arying needs of the company. Capital Structure !he capital structure of a company in%ol%es a decision regarding the ratio of o#nership capital as against credit capital, bet#een short*term and long*term capital and the ratio among the different sources of finance for capital. !his includes loans, bonds, share issues and reser%es.

nly in case of bigger units among #ith small scale sector capital is raised from the public. the same are contributed by the entrepreneur or by money borro#ed from relati%es and friends and sho#n as capital. and goods in the process of manufacture. Small Scale industries need ade+uate capital for the operation and gro#th. !rading in e+uity 3etaining control of a company . %illage and cottage industries and small borro#ers. character of business. reno%ation. /. $%en #hen there is re+uirement of capital. corporate ta'ation.. 2. $imitations of %stimating the &otal 'n(estment )e*uirements+ !here are many limitations arise in the estimation of fi'ed and #or)ing capital re+uirements of small scale units. modernization and e'pansion • (urchase and stoc)ing of ra# materials. • Fi'ed capital needs may be met by medium and long term loans #hile #or)ing capital re+uirement may be met by short term ad%ances. . It re+uires long term finance to ac+uire fi'ed assets li)e land and building.ature of enterprises $lasticity of the financial plan Legal re+uirements 6ar)et sentiment 3e+uirements of in%estors. !he long term finance is gi%en by the &o%ernment and de%elopment ban)s and short term finance is pro%ided by commercial ban)s. maintenance of machinery against depreciation. plant and machinery. 5. large number of industries commence production #ithout any capital. etc. ac+uisition of land building. gro#th. etc. 4. It is difficult to differentiate bet#een small scale industries.Capital Structure of a Company – Draw out a diagram Page No. etc. !he financial pattern of large scale and medium scale industries is +uite different from that of small scale industries. #i ed and wor"ing capital needs of small scale industrial units!he credit facilities for small case industries may be re+uired for – • 6eeting the e'penses incurred on installation of plant and machinery. size of industry.. 0. and short term #or)ing capital for the purchase of ra# materials and stores and for the payment of #ages. Conclusion+ Capital is the )ey input in small scale industries. Capital structure of small scale industries %ary #ith the size of business. 6any small units do not maintain proper boo)s of accounts. 1. ll small units are not registered #ith the State 9irectors of Industries. in%entories of goods. 294 from the te t !oo". small scale industrial unit re+uires funds before it can come into e'istence and it needs funds for e'pansion. s a result it is difficult to estimate the credit re+uirement for fi'ed and #or)ing capital for small scale industries. !he maintenance of proper ratios bet#een the different types of securities is )no#n as capital gearing and the follo#ing factors generally controls the capital gearing. ape <imitating others=. modernization and #or)ing capital. Capital Structure of Small Scale Sector !he capital structure of small scale industry is +uite simple. .