After formulation and evaluation of the project, the next step is to drawn out a financial plan to

meet the project costs. The financial plan should deal with to important aspects:-

1. determination of total capital required for taking up the project i.e. capitalization
2. deciding about the compostion of capital or financing mix i.e capital structure planning.

Any project - new or existing one -need funds for two important purposes. They are-
• fixed capital
• working capital

FIXED CAPITAL
Funds required to acquire fixed assets are termed as fixed capital. The total amount of fixed
capital is determine through project capital cost estimates. Any error in the fixed capital
estimation will have long term adverse effect on the financial condition of the enterprise and also
its profitability . besides, risk factor is generally associated with the fixed asssets
investments.wrong estimation of fixed capital may lead to over or under capitalization .

SOURCES OF LONG TERM FINANCE( FIXED CAPITAL)

The major sources of long term finance are –

1. borrowing form issue of corporate securities
2. borrowing from financial institutions
3. lease finance
4. retained earnings

1. Issue of corporate securities :-corporate security are two types-

a)ownership security- in India ownership securities are mainly two types-

i)equity share:- equity share are the main source of finance and its is contributed by the
owners of the companies. In the case of new company ,the promoter must contribute equity
share first and then the balance of shares(stock exchange stipulation –at least 60%) is
issued to the public. Equity .share comprising of initial issue ,right issue and ownership
issue.
ii)Preference share-preference share s confer on preference shareholders two rights viz., to
receive the preference dividend and get back their capital on the priority basis. Investors,
who like to earn a limited but steady return on their capital, preference shaer investment.

b)creditorship securities:- Debenture and bonds are called creditorship securities. In India the
words debenture and bonds are used interchangeably.

TREM LOAN: Term loan are presently most important source of finance. Loans are obtained from
banks and financial institutions are generally secured loans. They carried ixed rate of intt. And are
payable in installments. term loan are generally repayable with in a period of 10-25 years.
RETAINED EARNING :-reserves and surplus build over the past are called retained earnings
.these earnings can be reinterested in business for modernization and expansion .from the
ownership as well as cost of capital point of view,it is a source of similar to equity share capital.

DEFFERED CREIDITS:- many a time the supplier of P/M after deffered credit facility under
which payment for purchase of P/M can be made over a period of time .

2) financial institutions:- in order to meet the financial needs of the project ,a network of financial
institution has been created .this network consist of all India institutions and state level institution.

i)all India institution-

a)industrial finance corporation of India(IFCI
b)industrial credit and investment corporation of India(ICICI)
c)industrial development bank of India(IDBI)
d) small industrial development bank of India(SIDBI)
e) industrial reconstruction bank of India(IRBI)

ii) state level institution

a) state industrial development corporations(SIDCs)
b) state financial corporation(SFCs)

SOURCES OF SHORT TERM FINANCE

• ACCOUNT PAYABLE-they are created when the firm purchase raw materials, supplies
goods for re sale on credit terms on open account. They are intt. free and securities free.
• ACCURALS- they are short term liability that arises when securities are received by
payment has not yet been made . ex- wages ,salaries payable , tax payable ,expense
payable,etc
• COMMERCIAL PAPER – These consist of promissory notes with maturity of 3 to 270
days. Commercial paper is usually issued in higher denomination and can be used only by
large well known companies which enjoy a fairly high credit rating.

Ther are some other sources such as – bank credit , public deposits,private loans etc

LEASE FINANCE – “A contract between lessor and lessee where by the former acquires the
equipment/goods/plants as required and specify by the lessee and passes on goods to the lessee
for use of specific place .

OVERRUN FINANCE: Overrun means forward slippage in time and cost .overrun is of two types
mainly , time overrun and cost overrun. In case of any project ,when its completion and
commissioning is delayed or expected to be delay beyond the scheduled date, a ‘time overrun’ is
said to be occurred. Cost overrun is defined as increase in cost of the project as originally
envisaged.

BRIDGE FINANCE –Bridge finance is the finance provided by financial institutions and bank to
the new enterprenures to minimize the time lag between the sanctaion of loan and its disbursement
in order to enable early implementation of the project