SL2 CFRM with Hashan Waduge www.onlineaccounting.

lk

Sources of finance
Short-term sources of finance
Overdrafts - Overdrafts arise when payments from a current account exceed receipts into the
current account – the deficit is financed by an overdraft

K
Short-term loans - loan of a fixed amount for a specified period of time
Trade credit - main sources of short-term finance for businesses, as they can take advantage of credit

.L
periods granted by suppliers
Leasing - Useful alternative to purchasing an asset.

G
IN
Long term sources of finance
Debt finance - choice of debt finance depends on The size of the business, duration of the loan,
whether a fixed or floating is preferred & Security that can be offered. Bonds too categorized under

T
Debt Finance. These are the capital raised by a company for which interest is paid, usually half-yearly

N
and at a fixed rate. Bonds can be redeemable (repaid) or irredeemable (not repaid) and come in
various forms, including floating rate (variable interest rate), zero coupon (0% interest rate) and
convertible (converted into shares at a predetermined rate in the future)
U
Equity finance - Equity finance is raised from shareholders. A company raises it through the sale of
O
ordinary shares to new shareholders via a new share issue. Alternatively, it can be raised from
existing shareholders in a rights issue.
C

Pecking order
C

'Pecking order' refers to the preferred order in which some companies may use different sources of
A

finance and is as follows.

E

• Retained earnings
• Debt
N

• Equity
LI

Level of gearing
N

Gearing is defined as how much debt a company should use and is often the main focus of financing
decisions. The appropriate level of gearing depends on a number of practical issues.
O

• Stage in the company's life cycle

• Stability of earnings
• Operational gearing (contribution/PBIT)
• Security/collateral for the debt

These notes have been prepared as a summary from CA Study text. However Important things & Mind maps done using white board should
note down from your own.
SL2 CFRM with Hashan Waduge www.onlineaccounting.lk

Capital structure
Capital structure refers to the way in which an organisation is financed, by a combination of long-
term capital. The mix of finance can be measured by gearing ratios. However, using debt to finance
the business creates financial risk. When funding done through Equity by issuing shares, control can
be diluted & when funding done through Debt, should offer assets as security. When assets are
offered as security this generally means the borrower may not be free to dispose of that asset without

K
the lender's express permission. Both these situations are loss of control from business perspective.

The role of the treasurer

.L
• Liquidity management - Making sure the company has the liquid funds it needs, and invests

G
any surplus funds, even for very short terms

IN
• Funding management - concerned with all forms of borro
• wing, and alternative sources of funds, such as leasing and factoring

• Currency management - Exposure policies and procedures, Exchange dealing (futures and

T
options), Exchange regulations

•
N
Corporate finance - Involved with strategic decisions such as dividend policy or the raising
of capital, tactical decisions such as risk management, and operational decisions such as the
U
investment of surplus funds
O
Role of financial controller
• Managing the accounting department to ensure preparation of regular management accounts
C

for internal use and financial reports for external stakeholders.

• Preparation of budgets and analysis of variances against budgets.
C

• Cash flow management and reporting. This may overlap to some extent with the role of the
treasurer, so it will be important to ensure coordination with the treasurer.
A

• Management of working capital such as inventory and trade receivable. This role may also
overlap with part of the treasurer.
E

• Preparation of tax returns.

N

• Processing of payroll.
LI

Performance analysis
Ratios could be categorized into followings,
N

• Profitability and return

• Debt and gearing
O

• Liquidity: control of cash and other working capital items

• Shareholders' investment ratios (or 'stock market ratios')

These notes have been prepared as a summary from CA Study text. However Important things & Mind maps done using white board should
note down from your own.