PROJECT REPORT ON

“SOURCES OF FINANCE”
MASTER OF COMMERCE
ACCOUNTANCY
SEMESTER IV
2016-2017

SUBMITTED BY
AASHISH GAUD
Roll No. : 37
UNDER THE GUIDANCE OF
ASST PROF. SUJATA GADA.

NANJI BHAI KHIMJI BHAI THAKKAR THANE COLLEGE
AFFILIATED TO UNIVERSITY OF MUMBAI
SHETH J.T.T.COLLEGE OF ARTS, THANE (W)

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Sheth T.J. Education Society’s,
SHETH N.K.T.T. COLLEGE OF COMMERCE & SHETH
J.T.T. COLLEGE OF ARTS, THANE (W)
CERTIFICATE
OF
PROJECT WORK
This is to certify that,
Kumar. Aashish Gaud M.Com (Accountancy) Semester-IV Roll No:37 has undertaken &
completed the project titled “SOURCES OF FINANCE” during the academic year 2016-17
under the guidance of Asst Prof. SUJATA GADA submitted on / / 2017 to this college in
fulfillment of the curriculum of

MASTER OF COMMERCE

UNIVERSITY OF MUMBAI.

This is a bonafide project work & the information presented is true & original to the
best of our knowledge & belief.

(ASST.PROF. SUJATA GADA)

PROJECT GUIDE EXTERNAL EXAMINER

(DR.P.M.KARKHELE) (PROF.ANIL KHADSE)
PRINCIPAL COURSE COORDINATOR

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ACKNOWLEDGEMEMT

This project bears all those who directly or indirectly helped and extended their
kind support in completing this project.

At the time of making this report I express my sincere gratitude to ASST
PROF. SUJATA GADA (internal project guide) for providing streamed guidelines
since inception till the completion of project.

I met during the course of this project, for their support and for providing
valuable information which help me to complete this project successfully.

At this moment I also almighty God for the blessing showed upon me, my
parents for their support and care and also my friends for their valuable Suggestions.

This project report is a collective effort of all and I sincerely remember and
acknowledge all of them for their excellent help and assistance throughout the
project.

Course name: M.Com (Semester-IV)

College name: Sheth N.K.T.T. College of Commerce & Sheth J.T.T. College of Arts,
Thane.

University: Mumbai University

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DECLARATION

I, AASHISH GAUD hereby declare that the project report entitle “SOURCES OF
FINANCE” under guidance of ASST PROF. SUJATA GADA submitted in partial
fulfillment of the Degree of M.Com(Accountancy) to Mumbai University is my original
work.

Signature:

Date: / / 2017

Place: Thane

INDEX OF CONTENT
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Choosing an appropriate SOF 27 6. Source of Finance 07 3. Different Decision Makers 32 8. 1. Singer ( Sri Lanka) PLC 35 10. Impact of Several Source of 30 Finance 7. Conclusion 38 11. Advantages & Disadvantages 17 of SOF 5.0 Introduction Page | 5 . Introduction 06 2. Financial Planning 34 9.Sr. No. Different Source of Finance 15 4. Title Page No. References 39 1.

The report also provides analysis of Singer (Sri Lanka) PLC’s balance sheet for sources of finance. This is an informative and analytical report on Sources of finance. All of the information and research for this report is through the World Wide Web. Page | 6 . The report is written as an assignment of ‘Managing financial resources and decision’ module of the first semester for the evaluation of our understanding and knowledge of the sources of finance to the lecturer Mrs. Sujata. This assignment also tests our knowledge on choosing the appropriate source of finance and financial planning.

1 Personal savings This is the amount of personal money an owner. Not all the profits made by a company are distributed as dividends to its Page | 7 .1. They can be classified as Internal and External. It would be uncomplicated to classify the sources as internal and external. Short-term and Long-term or Equity and Debt. 2.1. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. It is also crucial for businesses to choose the most appropriate source of finance for its several needs as different sources have its own benefits and costs. partner or shareholder of a business has at his disposal to do whatever he wants. Sources of financed can be classified based on a number of factors. development and expansion. Internal sources of finance consist of:  Personal savings  Retained profits  Working capital  Sale of fixed assets 2.1 Internal sources of finance Internal sources of finance are the funds readily available within the organisation. 2. partner or owner for a business’s financial needs the source of finance is known as personal savings.0 Sources of Finance Finance is essential for a business’s operation. When a business seeks to borrow the personal money of a shareholder. 2.2 Retained profits Retained profits are the undistributed profits of a company. Finance is available to a business from a variety of sources both internal and external.

Proper working capital management is also vital as it is also a source of finance for a business. It is very important to maintain the right amount of stock of goods for a business. sold or keep changing in the short run. Working capital is the difference of current assets and current liabilities (i. These assets are used up. Stock – this refers to the stock of goods available to the business for sale at a given time. The payment being made even before the expense occurs is a prepayment.shareholders. Prepayments. Debtors. 2. Retained profits are a very valuable no-cost source of finance. Page | 8 . Bank and Cash. Prepayments – these are the expenses paid in advance. Debtors – are a business’s customers owing money to the business having been bought the business’s goods or service on credit. If stock levels are too high it means that too much of money is being held up in the form of stock and if stock levels are too low the business will lose possible opportunities of higher sales.3 Working capital Working capital refers to the sum of money that a business uses for its daily activities.1. Working capital = Current assets – Current liabilities). This remainder of finance is saved by the business as a back-up in times of financial needs and maybe used later for a company’s development or expansion. Current assets consist of Stock.e. The remainder of the profits after all payments are made for a trading year is known as retained profits. If a business has cash flow problems it can maintain a low level of debtors by encouraging the debtors to pay as early as possible. Current assets Current assets are also known as cash equivalents because they are easily convertible to cash.

Dividends proposed – are the dividends payable for the year that is not yet paid. Having too much of money in the form of cash is also not good for a business since it can use that money to invest and earn a return but however a business should have healthy current ratio (current assets : current liabilities) of 2:1. 2. fixtures and fittings and equipment. Paying the creditors’ as late as possible will ease cash flow requirements for a business. Selling fixed assets reduces the production capacity of a business affecting a business’s return. Tax owing – is the sum of money owing as tax. Sometimes where the fixed asset is a surplus and is abandoned. Current liabilities Current liabilities are short-term debts that are in immediate need of settlement. Bank and Cash – Bank is the cash held in banks and cash is money held by the business in the form of cash.4 Sale of fixed assets Fixed assets are the assets a company that do not get consumed in the process of production. These obligations have to be paid within a year. Some examples of fixed assets are land and building. Creditors – also known as trade creditors are suppliers from whom the business purchased goods on credit. vehicles. Accruals – are the expenses owed by the business. machinery. Some examples of current liabilities are creditors. it can be sold to raise finance in demanding times for the business. Page | 9 . accruals. proposed dividends and tax owing. Otherwise businesses may choose to stop offering certain products and sell its fixed assets to raise finance.1.

1. They are: o Ordinary shares o Preference shares 2.2 External sources of finance Sources of finance that are not internal sources of finance are external sources of finance.2. External sources of finance can either be:  Ownership capital or  Non-ownership capital 2. Preference shareholders do not have the right to vote at general meetings of the company.2 Preference shares Preference shares are another type of shares. Preference shareholders receive a fixed rate of dividends before the ordinary shareholders are paid. It can be the capital funding by owners and partners or it can also be share bought by the shareholders of a company. Companies can issue ordinary shares in order to raise finance for long-term financial needs.1 Ownership capital Ownership capital is the money invested in the business by the owners themselves.1 Ordinary shares Ordinary shares also known as equity shares are a unit of investment in a company. Ordinary shareholders have the privilege of receiving a part of company profits via dividends which is based on the value of shares held by the shareholder and the profit made for the year by the company. External sources of finance are from sources that are outside the business. There are mainly two main types of shares.1.2. They also have the right to vote at general meetings of the company.2. Preference shares are also an Page | 10 .2. 2.

Participating preference share and Convertible preference share. Cumulative preference shares – if a company is in a loss making situation and is unable to pay dividends for one year then the dividend for that year will be paid the next year along with next year’s dividends. Normally the date of redemption is usually agreed. Some of them are Cumulative preference share. Convertible preference shares – convertible preference shareholders have the option of converting their preference shares to ordinary shares. Redeemable preference share.ownership capital source of finance. 2. The main obligations of non-ownership capital are to pay back the borrowed sum of money and interest.2 Non-ownership capital Unlike ownership capital. non-ownership capital does not allow the lender to participate in profit-sharing or to influence how the business is run. Different types of non-ownership capital: o Debentures o Bank overdraft o Loan o Hire-purchase o Lease o Grant o Venture capital Page | 11 . The additional dividend is usually paid in proportion to ordinary dividends declared. Redeemable preference shares – these preference shares can be bought back by the company at a later date. Participating preference shares – give the benefit of additional dividends to its shareholders above the fixed rate of dividends they receive. There are several types of preference shares.2.

Debentures can be secured. unsecured. Debenture holders are not owners but long-term creditors of the company.2. They are also called mortgage debentures. o Factoring o Invoice discounting 2. Unsecured debentures – these debentures do not have an asset as collateral.2. Debentures are issued only for a time period and thus the company must pay the amount back to the debenture holders at the end of the agreed period. fixed or floating.1 Debentures Debentures are issued in order to raise debt capital. 2. Floating debentures – do not have fixed rate of interest and are not tied to any specific asset. This facility allows businesses to withdraw Page | 12 . Secured debentures – are debentures that are secured against an asset. Convertible debentures – can be converted to stock at the end of the debenture repayment date. Registered debentures – are not easily transferable and legal procedures have to be followed in case of a transfer.2. Fixed debentures – have a fixed rate of interest. Debenture holders receive a fixed rate of interest annually whether the company makes a profit or loss.2. Bearer debentures – these debentures are easily transferable.2 Bank overdraft Bank overdraft is a short term credit facility provided by banks for its current account holders.

However loans can be substituted by other alternative sources of finance which are more suitable. Page | 13 .2. The hire purchase firm buys the asset on behalf of the business and gives the business the sole usage of the asset. Leasing is of two types. The business on its part must pay monthly payments to the hire purchase firm amounting to the total value of the asset and charges of the hire purchase firm. 2.2. At the end of the payment period the business has the option of purchasing the asset for a nominal value. The leasing firm is known as the lessor and the customer as lessee. namely Finance lease and Operating lease. Unlike a hire purchase the ownership of the asset remains with the leasing company.2. 2.more money than their bank account balances hold. 2.2.4 Hire purchase Hire purchase allows a business to use an asset without paying the full amount to purchase the asset. Bank overdraft is the ideal source of finance for short-term cashflow problems.5 Lease In a lease the leasing company buys the asset on behalf of the business and the asset is then provided for the business to its use.2. Interest has to be paid on the amount overdrawn.2. The business pays a rent throughout the leasing period.3 Loan Loans are amounts of money borrowed from banks or other financial institutions for large and long-term business projects such as the development or expansion of the business.

Grants can be given by the government or private firms. 2. Operating Lease – this lease does not run for the full life of the asset and the lessee is not liable for the full value of the asset.8 Factoring This is where the factoring company pays a proportion of the sales invoice of the business within a short time-frame to the business. Finance Lease – this is where the lessee’s monthly payments add up to at least 90% of the total value of the asset. The remainder of the money will be paid only after deducting the factoring company’s service charges.7 Venture capital Venture capital is the capital that is contributed at the initial stages of an uncertain business.6 Grant Grants are funding given to businesses for programs or services that benefit the community or public at large. 2.2. Factoring is of two types: Recourse factoring and Non-recourse factoring.2. 2.2. The residual risk is taken up by the lessor. Page | 14 . The investor expects to have some influence over the business.2.2. The chance of failure of the business is great while there is also a possibility of providing higher than average return for the investor. For example a grant may be given to open a new factory where unemployment is high. The remainder of the money is paid to the business when the factoring company receives the money from the business’s debtor.2. Some factoring companies even offer to maintain the sales ledger of the business.

Recourse factoring – In this type of factoring the client company is liable for bad debts.2. Once the payment is received it is deposited in a bank account controlled by the invoice discounter. Non-recourse factoring is usually more expensive because of the high risks experienced by the factor. In contrast to factoring.2. Non-recourse factoring – is where the factor takes responsibility for the payment of the debtors. The client company is not liable if debtors do not pay back. 2. Page | 15 . The invoice discounter will then pay the remainder of the invoice less any charges to the client. the client company collects the money from its debtors.9 Invoice discounting In invoice discounting the client company send out a copy of the invoice to the invoice discounting firm. The client then receives a portion of the invoice value.

Retained profits – have opportunity cost.0 The financial costs of the different sources of finance Personal savings – have low costs since they are provided by an owner. The asset may cost much more than what it sold for if it wants to replace it. Hire-purchase – the business ends up paying more than the original value of the asset for its purchase. Otherwise there aren’t any other costs for this source of finance. If it sells unused or abandoned fixed assets then only the potential production capacity reduces. The owner may charge a rate of interest for the loan provided. partner or shareholder. Sale of assets – by selling fixed assets it uses then the firm’s production capacity will diminish. Lease – the ownership of the asset remains with the leasing company even after the business pays more than 90% of the asset’s value but however some leasing firms provide the option of purchase of the asset a nominal value. Bank overdraft – interest is a little higher than for bank loans and interest is calculated on a daily basis. Debentures – have to be paid a fixed or floating interest depending on the type of debenture that is issued. Working capital – they do not have any costs other than opportunity cost. Loans – Interest is usually fixed for short term loans. Interest rates are lower than for bank overdrafts. printing and distribution fee and advertising fee. Sometimes firms will have to stop offering certain products or services in order to sell its asset and raise finance. Ordinary and Preference shares – dividends has to be paid out of profits to shareholders as a return for their investment in the business.3. Page | 16 . There are administrative costs occurring from issuing shares like stock exchange listing fee. that is the money could have been used elsewhere for some other purpose. and long-term loans usually have a variable rate of interest.

5% of turnover. Credit management and administrative fee are also charged and ranges from about 0. Interest is calculated on a daily basis.75% to 2.5% to 3% of the invoice value as finance charges. Venture capital – the venture capitalist will have some influence over the business and the business will have to share profits with the investor.Grants – are free and have no financial costs. Factoring – Factors charge a rate of interest of about 1. The investor will want the capital back at a later date. Page | 17 . Invoice discounting – Invoice discounting also charges a rate of interest of about the same but its credit management and administrative charges are lower than a factors because only finance is provided and sales ledger is not maintained by an invoice discounting firm.

2 Retained profits Advantages  They need not be paid back since it is the organisation’s own savings.1 Personal savings Advantages  The owner would not want collateral to lend money to the business.  Since it is an informal agreement.  There are no interest payments to be made on the usage of retained profits. if the owner demands the money back in a short notice it might cause cashflow problems for the business.0 Advantages and Disadvantages of the different sources of finance 4.  There is no paperwork required. Disadvantages  Personal savings is not an option where very large amounts of funds are required. Page | 18 . 4.4.  The money need not necessarily be paid back to the owner on time.  Can be interest free or carry a lower rate of interest since the owner provides the loan.

 External parties cannot influence business decisions.  The company’s debt capital does not increase and thus gearing ratio is maintained.3 Working capital Advantages  Since it is an internal source of finance there are no costs involved. Disadvantages  Opportunity costs are involved.  No repayment is needed.  Working capital cannot raise large amounts of funds.  Will not increase debt capital of the firm so gearing ratio is maintained.  There are no costs raising the finance such as issuing costs for ordinary shares. 4. Page | 19 .  Is not suitable for long term investments.  Retained profits are not available for starting up businesses or for those businesses that have been making losses for a long period.  The plans of what is to be done with the money need not be revealed to outsiders because they are not involved and therefore privacy can be maintained. Disadvantages  There maybe opportunity costs involved.

4.  No interest payments are required.  Would be the ideal source of finance if it was for an asset replacement.4 Sale of assets Advantages  Funds are again raised by the business itself and therefore need not be paid back.  If the asset is sold and the money is spent without return then the business is broke.  Total risk is undertaken by the company.5 Ordinary share issue Advantages  The amount need not be paid back – it is a permanent source of capital.  Large amounts of finance can be raised depending on the fixed asset sold.  If the business wants to buy a similar asset later on it may cost more than it was sold for. Page | 20 .  The asset may be able to generate more income than the purpose it was sold for. Disadvantages  If the asset is sold then the business would lose opportunities to generate income from it.  Using working capital as a source of finance will affect the current ratio of the business 4.

 Preference shareholders need not be paid if the company makes a loss.  May result in over-capitalisation where dividend per share falls. 4.  If the company follows a rational dividend policy it can create huge reserves for its development program.  It incurs issuing costs.  Able to raise large amounts of finance.6 Preference share issue Advantages  Have no voting rights and thus the management can retain control over the affairs of the company.  Groups of equity shareholders holding majority of shares can manipulate the control and management of the company. Page | 21 .  No collateral is required for issuing shares.  Possible chances of takeover where an investor buys more than 50% of the total issued shares value.  It will help reduce gearing ratio Disadvantages  Issuing shares is time consuming.  The dividends need to be paid only if the company makes a profit.  There are legal and regulatory issues to comply with when issuing shares.  Once issued the shares may not be bought back and therefore the capital structure cannot be changed.

 Redeemable preference shares can be redeemed.  Taxable income is not reduced by preference dividends unlike debentures where interest paid reduces taxable income.  Debentures can be redeemed when the company has surplus funds.  Preference shares are usually cumulative and thus twice the amount must be paid the following year if dividends are not paid on the year they need to be paid. time consumption and legal requirements. 4.  Even if the company makes large profits preference shareholders need to be paid only a fixed rate of interest.7 Debentures Advantages  Debenture holders do not have rights to vote at the company’s general meetings. large amounts of capital can be raised.  Tax benefits – debenture interests are treated as expenses and charged against profits in the profit and loss account. Disadvantages  Even if the company makes a very small profit it will have to pay the fixed rate of dividend to its preference shareholders.  Has other benefits similar to ordinary share issue such as – no repayment required. Disadvantages Page | 22 .  Have other drawbacks similar to ordinary share issues such as the cost. permanent source of capital and no collateral required.

 Debenture interests have to be paid regardless the company makes a profit or loss. Disadvantages  There is a limit to the amount that can be overdrawn.  The money borrowed has to be paid back on an agreed date.  Interest has to be paid on an overdraft that is calculated on a daily basis and sometimes the bank charges an overdraft facility fee too.  Interest is only paid when overdrawn and on the exact amount needed  Since overdraft is a short term debt it is not included in calculating the firm’s gearing ratio.8 Bank overdraft Advantages  No security is needed for a bank overdraft.9 Loans Page | 23 .  Overdrafts are meant to cover only short-term financing and are not a permanent or long-term source of finance  Interest is calculated on a variable rate and therefore it is difficult to calculate the cost of borrowings.  Easy and quick to arrange.  Ideal for short-term cashflow deficits. 4.  Overdrafts can be recalled by the bank at any time if not stated in the agreement. 4.

 Need not be paid back for a fixed time period and banks do not withdraw at a short notice.  Suitable for long-term investments.Advantages  Large amounts can be borrowed.10 Hire purchase Advantages  The business gains use of the asset before paying the asset’s value in full.  Hire purchase instalments are taxable expenditures.  The lender has no say on how the money is spent.  Loans will affect a company’s gearing ratio.  At the end of the payments ownership of the asset is transferred to the company.  Interest rates are lower than for bank overdrafts and are set in advance. Page | 24 .  The payment is made in affordable instalments. Disadvantages  Collateral is needed. 4.  The amount borrowed has to be repaid at the agreed date.  Interest is charged.

 The asset will cost the company more than the original value.  It is easier to obtain a lease than a commercial loan.  In an operating lease. Disadvantages  Ownership remains with the lender until the last payment is made.  The total cost and the lease period is pre-determined and thus helps with budgeting cashflow.  Lease is inflation friendly where the agreed rate is paid even after five years when other costs increase due to inflation. 4.  If payments are not made on time the lender has the right to repossess the asset.  If the asset is required to be replaced due to breakdown or because it is out-dated in which case the payment may still have to be made and the asset replaced. payments are made only for the usage duration of the asset.11 Lease Advantages  The amount in full need not be paid in order to start using the asset. Disadvantages Page | 25 .  Payments can be made from the asset’s usage and return of the asset.

 The ownership of the asset remains with the lessor even after payments but however in a finance lease the option is provided to buy the asset at a nominal value. Page | 26 .  Not all organisations are eligible for grants. 4.  There are no costs involved in obtaining a grant.12 Grants Advantages  Grants do not have to be paid back. Disadvantages  Grants are given on certain restrictions and laws imposed by the government.  Grants are given freely and therefore are very competitive because lots of firms try for the same source of fund.  Lease cannot be terminated whenever at lessee’s will.13 Venture capital Advantages  Venture capitalists invest large sums of money in the business. 4.  In a finance lease the lessee ends up paying more than the value of the asset.

Disadvantages  The profits will be shared with the investor.  They may also bring a lot of experience and expertise along with the money.  Venture capitalists are only periodical investors wanting to exit the business at some stage.  Helps a business to have a smooth cashflow operation.  Non-recourse factoring protects the client company from bad debts.  The money collections from debtors are undertaken by the factoring company. Disadvantages Page | 27 . 4.  Since they become owners by investing in the business they have equal interests in the business’s success.  The sales ledger of the business can be outsourced to the factor.14 Factoring Advantages  A large proportion of money is received within a short time-frame.  Acquiring venture capitals is a lengthy and complex process where a business plan and financial projections must be submitted to the potential venture capitalist  As an owner of the business the venture capitalist may want to influence the strategic decisions and take control of the business.

4.  Costumers would not like factoring companies collecting debts from them.  Less costly than factoring since the sales ledger is maintained by the client company.  The cost will be a reduction on the company’s profit margin.  There is some amount of privacy since the sales ledger is maintained by the client company and only some invoices are submitted for immediate cash.  Sales ledger has to be maintained by the client company itself.15 Invoice discounting Advantages  The client company receives the money in a short period.  The business has to pay interests and fees for the factor for its services.  Lack of privacy since the sales ledger is maintained by the factor.  Unlike factoring customers are not aware of invoice discounting since the debt collection is undertaken by the client firm. Disadvantages  Debt should be collected by the client company itself and thus resources and time are wasted in debt collection. Page | 28 .

1 The amount of money needed This is the amount of finance the organisation wants to raise.5. Therefore the amount of money required is a key factor in choosing a source of finance. Not all sources of finance provide all amounts of funds. Therefore it is necessary to identify the amount of money needed by the company to choose a suitable source of finance. For example borrowing a commercial loan for a small and short-term cash flow problem is unwise because loans may have a minimum amount that can be borrowed so taking a bank overdraft would be wise where money can be borrowed in small sums and bank overdrafts can be paid back quickly. The factors that need to be considered when choosing an appropriate source of finance are:  The amount of money needed  The urgency of funds  The cost of the source of finance  The risk involved  The duration of finance  The gearing ratio of the business  The control of the business 5. Finance is needed for several purposes and different purposes need sources of finance which are most suitable to them. Some sources are not able to raise large amounts of funds whereas others are not flexible enough to put up for the small sum of money the business requires.2 The urgency of funds Page | 29 .0 Choosing an appropriate source of finance There are many sources of finance available to a business. 5. When choosing an appropriate source of finance some factors have to be considered.

5.5 The duration of finance This is the time period for which the money is needed.4 The risk involved The risk involved is the certainty of receiving returns for the lender on the investment made using the finance.This refers to the amount of time the business can spend on collecting funds. For example issuing shares is a very long and complex process where there are legal requirements and then the potential shareholders have to be informed (advertising) and after all these the money is collected through the process of application and allotment which takes more time.3 The cost of the source of finance Different sources of finance have different costs as discussed above. The urgency of funds needs to be identified also because certain sources of finance need more time to be raised than other sources of finance.6 The gearing ratio of the business Page | 30 . 5. Sometimes however the time does not permit organisations to look for cheaper sources of funds. By identifying the length of requirement of finance the organisation can eliminate inappropriate sources of finance and choose a source of finance that is more suitable for the required timeframe. 5. If the provider of finance is not confident that the project in which his money is invested in is less likely to reap returns then the lender would be reluctant to provide the business with funds. If the business has plenty of time before its financial needs need to be met then it can spend time searching for cheap alternatives of sources of finance. In simpler words it is the sureness of success of the project. It can be for a short-term (within one year). 5. It is always more profitable to a business to seek and obtain cheaper sources of finance. medium-term (one to five years) or long- term (five years and more) time period. In this case the money can be secured against an asset as collateral which will encourage the lender to lend. Internal sources of finance are always cheaper than external sources of finance. On the other hand if the business wants the money as soon as possible then it would have to make some cost sacrifices and accept a source of finance that may even cost higher.

If a business is high geared then commercial lenders will be unwilling to give loans because the business is already operating on more loans than equity capital. A high geared company will have to pay more of its profits as interests on loans and other debt capital.7 The control of the business The existing shareholders of a company would be reluctant to issue shares because this would cause a dilution in control of the business. The same can be said for venture capitalists where the money is invested as equity and being owners the venture capitalists have the right to influence how the business is run.The gearing ratio plays an important role in the availability of the sources of finance since the gearing ratio shows the ratio of debt capital to the total capital of a business. The existing shareholders and owners of a business who would not want any change to arise in the control and ownership of the business would disregard sources of equity finance. 5. That being the case potential lenders fears the business’ ability to be able to cope with more interest payments and debt settlement. Issuing shares in public limited companies also gives opportunity of takeovers to outside parties. Page | 31 .

6. This portion of the report investigates how each source of finance is recorded and affects the financial statements. If any interest payments are to be made they will be recorded in the profit and loss account and charged against profits.0 The impact of several sources of finance on the financial statements Financial statements keep record of a business’s trading year (Trading. The amount lent will appear as Long-term liabilities on the balance sheet. The depreciation of the asset along with its original price will be removed from the balance sheet. The profit or loss made on the sale of asset will be recorded in the profit and loss account for the year. Sale of assets – Sale of assets will reduce the value of fixed assets on the balance sheet. The interest paid on debentures is reduced from profits before tax is charged. Ordinary shares and preference shares – The issue of ordinary shares and preference shares increase the vale of equity capital in the balance sheet. The dividends paid to the shareholders are recorded in the appropriation account after tax is deducted from net profit. Obtaining finance from different sources bring about a change in the financial statements. The value of debentures along with the rate of interest and the repayment date is presented in the equity and liabilities section of the balance sheet. If the issued shares market price is greater than the nominal value of the share then share premium is also increased in the balance sheet. profit and loss account) and show the financial position of a business as at a date (Balance sheet). Personal savings – Personal savings when lent to the business are considered as loans. The number of shares issued is also displayed in the balance sheet and for preference shares the rate of dividend is also shown. Page | 32 . Debentures – Debentures are a type of debt capital.

Venture capital – This is an amount of money invested in the business as equity capital and thus comes under equity capital in the balance sheet. The interest charges and fee is recorded in the profit and loss account. Factoring and invoice discounting – This does not appear in the balance sheet. However the money received from factoring and invoice discounting can show higher balances of cash. The loan when displayed on a balance sheet will usually contain information about the repayment date and the interest charged on the loan. The interest is charged in the profit and loss account.Bank overdraft – This appears in the balance sheet as a current liability since it is a short- term debt and has to be paid back within a year. The return for venture capitalists is a share of profits which is recorded in the appropriation account. The interest charges and bank overdraft fee if charged are deducted from the profit and loss account before tax is charged. Loan – Loans are long-term debts and therefore come under long-term liabilities in a balance sheet. Page | 33 .

7. The information for different parties is all taken from financial reports. The relationship is shown as a ratio or as a percentage. Ratio analysis The ratio shows the relationship between two relevant items in the financial statement. trend analysis and ratio analysis. A long-term lender will always want to know the gearing ratio of a company while the short-term lender will want to know about the liquidity ratio of the business. Different ratios calculable on a business’s financial statements are:  Liquidity ratios – o Current ratio o Quick ratio / Acid test ratio  Working capital ratios – o Stock turnover ratio o Average debt collection period o Average credit taken from creditors  Profitability ratios – o Return on capital employed Page | 34 . The business’s financial statement can be analysed in a number of ways. cashflow and financial statements such as the balance sheet and profit and loss account. Some of them are horizontal analysis. Using this information the interested parties make decisions regarding the business. vertical analysis. The manager needs accounting information to take managerial decisions since all functions of an organisation are tied to the financial strength of a business. the financial stability and profitability of an organisation can be analysed and interpreted. Using the financial statements.0 The information needs of different decision makers Different decision makers will want different information about the company regarding their interests in the business.

Page | 35 . o Gross profit margin ratio o Profit before interest and tax/Sales o Profit after tax/Sales  Financial stability / Solvency ratio – o Financial gearing ratio o Debt/Asset ratio o Interest cover ratio  Investment performance ratio o Dividend per share o Dividend yield o Earning per share o Price-Earnings ratio o Interest yield o Redemption yield The above ratios being calculated the performance of the business can be assessed and necessary decisions can be taken by relevant parties. Due to limited time the ratios have not been explored in detail.

8. maintain and expand the business. the products it is likely to produce and whether the business will market its product efficiently. Financial planning influences the raw material a business is able to afford.0 Financial planning Importance of financial planning Financial planning affects the terms and conditions on which the business will be able to obtain funding required to establish. A healthy financial plan consists of the following:  The basic financial statements  Ratio analysis  Budgets  Break-Even analysis  Pricing formulas and policies  Types and sources of capital available to finance business operations  Short and long term planning considerations necessary to maximise profits The business owner/manager who understands these concepts and uses them effectively to control the evolution of the business is practicing sound financial management thereby increasing the likelihood of success. It will affect the resources the business is able to acquire to operate and it will be a major determinant of the success of the business. A financial plan not only help the business to understand what it wants to do but also helps the business understand how to achieve it. Page | 36 .

diversified company unlike any other in Sri Lanka. It is a member of the worldwide franchise Singer. industrial and financial categories. Given below is Singer (Sri Lanka) PLC’s balance sheet.0 Singer (Sri Lanka) PLC Singer is a public limited company that was established in 1877.9. Today Singer is a large. Beginning with sewing machines. Singer’s product portfolio consists of a range of household. Page | 37 .

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715.348  Retained earnings are the accumulated earnings of a company o = LKR 373.  Fixed or Non-current assets that can be sold are potential sources of finance that is categorised as sales of assets o Property. Plant and Equipment = LKR 1.249.146  Working capital is current assets minus current liabilities o Working capital (7.1 Identifying sources of finance in Singer (Sri Lanka) PLC’s balance sheet.661.964.553.383.419.9.951.616 Page | 39 .050  Loans and borrowings o = LKR 1.730 – 6.302.382) = LKR 1.855.048.178  Share capital o = LKR 629.011.

10. The limitedness of time has not allowed for further research and more detail. However further work need to be done. It is important to choose an appropriate and cheap source of finance for the smooth operation of the firm. There are important factors to consider when choosing a source of finance.0 Conclusion Sources of finance is available from variety of sources but each source has its own cost and benefits. Page | 40 .

org/docrep/w4343e/w4343e08.gov. https://www.co.forbes.fao.0 References 1.business. https://www.co.au/money-profit-and- accounting/raising-funds-for-your-business/sources-of- finance 8.com/forbes/welcome/? toURL=https://www.net/business/reference/sources-of- finance-for-a-startup-or-small-business 9.com/sources-of- finance/sources-of-finance 2.forbes.uk/business-finance-6-sources-of- finance-for-a-business/ 7.htm 4.html 6.slideshare.google. https://efinancemanagement.net/anchalkesari/sources-of- finance-13947839 5. https://www.co.vic.edu/agdm/wholefarm/html/c 5-92. http://startups. https://www.co.bbc.bbamantra. http://www.in/&referrer=http s://www.iastate.google.extension.shtml 3.tutor2u.in/ 10. http://www.html&refURL=https://www.com/2010/07/06/best-funding- sources-for-small-business-entrepreneurs-finance-dileep- rao. http://www.com/long-term-sources-of-finance/ Page | 41 . http://www.uk/schools/gcsebitesize/business/financ e/sourcesoffinancerev2.11.