INTRODUCTION TO
FINANCIAL
MANAGEMENT
SOURCES OF FINANCE
Significance of Business Finance
• To meet fixed capital requirement (fixed assets- Plant and machinery, land & building)
• To meet working capital requirement (stock, payment of expenses)
• For growth and expansion (ex- install more machines)
• For diversification
• For survival
Classification of Finance
On the basis of On the basis of
On the basis of
periods sources of
ownership
generations
Long Term Owner’s Fund Internal Trade
Medium term Borrowed
External Trade
Fund
Short term
1 On the basis of periods
1.1 Long Term Finance
Long Term Finance
• Fulfils the financial requirements of an enterprise for a period exceeding five years
• Used for investment in fixed assets like plant & machinery, land and building etc.
• Sources of long term finance are- • Issue of Shares
• Issue of Debentures
• Loan from banks & financial institutions
• Retained Earnings
• Hybrids (Convertible Bonds, warrants)
1.2 Medium Term Finance
Medium Term Finance
• It is raised for a period of more than one year but less than five years
• It is required for introduction of new products, technology upgradation, and repaying the
debts
• Sources of medium term finance are- • Debentures
• Financial institutions
• Public Deposits
• Commercial Banks
• Hybrids
1.3 Short Term Finance
Short Term Finance
• It is procured to meet the short term needs of working capital.
• It is meant for 12 months or less
• Sources of short term finance are- • Trade Credit
• Commercial Papers
• Accruals
• Bank Credit
2 On the basis of Ownership
2.1 Owner’s Funds
• Equity Shares
• Preference Shares
• Retained Earnings
2.2 Borrowed Funds
• Debentures
• Loan from Banks
• Loan from Financial Institutions
• Public Deposits
• Lease financing
• Commercial Paper
3 On the basis of Sources of
Generation
3.1 Internal Sources
Internal • Retained Earnings
Sources • Equity Share Capital
3.2 External Sources
• Financial Institutions
• Preference Shares
• Public Deposits
External • Debentures
• Lease Financing
Sources • Commercial Paper
• Trade Credit
INTRODUCTION TO
FINANCIAL
MANAGEMENT
Leasing
Introduction
• Lease is an agreement between two parties- “Lessor” and “Lessee”
• The lessor owns the Capital Asset (Plant & Machinery, car) but allows the Lessee to use it
• Lessee makes payments to Lessor for using the Asset as per the terms of Lease for specified period
• Types of lease- Operating Lease and Finance Lease
Operating Lease
• Lessor supplies the Asset to Lessor
• Lessor is responsible for maintaining and servicing of the Leased Asset
• The period of lease is short and less than the economic life of the Asset
• At the end of the lease agreement, the lessor can lease the Asset to someone else or sell the
equipment
Finance Lease
• Lessor is generally the provider of Finance.
• Finance House acts as a Lessor and purchases the Asset from the vendor and lease it to lessee
• Lessee is responsible for maintaining and servicing of the Leased Asset
• The period of covers all or most of the economic life of the Asset
• At the end of the lease agreement, the lessor would not be able to lease the asset to someone else as
the Asset would be worn out
INTRODUCTION TO
FINANCIAL
MANAGEMENT
Commercial paper
Introduction
• It is a short term negotiable instrument with a fixed maturity
• It is issued by company to meet its working capital requirements
• It has a feature of usance promissory note (notes which are payable after a period of time)
• These are issued at discount and can be Interest bearing securities as well
• These are not backed by securities and issued by credit-worthy companies
Eligibility
• Tangible Net Worth of the company is not less than Rs. 4 crores (as per latest Audited Balance Sheet)
• It has obtained credit rating from Credit Rating Agencies
• Time Period- minimum 15 days and maximum up to one year
• Issued in denominations of Rs. 5 lakhs (i.e., Amount should not be less than Rs. 5 lakhs)
INTRODUCTION TO
FINANCIAL
MANAGEMENT
Public Deposit
Introduction
• It is money received by a company through the Deposits or loans collected from the public
• It finances the medium-term and long-term requirements of the company
• Public includes- general public, employees and shareholders of the company
• It is regulated by RBI to ensure safeguarding of Public Interest
INTRODUCTION TO
FINANCIAL
MANAGEMENT
Trade Credit
Trade Credit
• Credit extended by a supplier of Goods and services
• Indirect short-term source of finance
• Credit facility is usually given for 30 to 90 days
• These are known as Creditors ( or Accounts payable)
Trade Credit
• Informal arrangement between Buyer and Seller regarding credit period
• Does not create a charge on Asset
• More lenient for trusted customers
• Customers are not given the discount which is given on cash payment (ex- 2/15 net 45)
INTRODUCTION TO
FINANCIAL
International Sources of
MANAGEMENT
Finance
INTRODUCTION TO
FINANCIAL
Foreign Currency
MANAGEMENT
Convertible Bonds
FCCBs
• Convertible bond in which the money is raised in form of foreign currency
• Currency is different from the domestic currency of the issuing company
• It is mix of Debt and Equity (hybrid instrument)
• Interest will be paid in foreign currency, so more exchange risk is involved
FCCBs as Hybrid Instrument
• FCCB holder receive regular coupon payments which act as a Debt
• On maturity (or other specified time) investors have an option to convert these bonds into Equity
• Price of conversion into Equity shares is determined at the time of issuance of FCCBs
• FCCBs are redeemed at maturity if not converted into Equity
INTRODUCTION TO
FINANCIAL
External Commercial
MANAGEMENT
Borrowings
ECBs
• Commercial loans availed from non-resident lenders
• Minimum average maturity is 3 years
• Include bank loans, suppliers’ and buyers’ credits, fixed and floating rate bonds (non-convertible),
borrowings from private sector undertaking
Thank You
