Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Financial management is defined as the management of flow of funds in a firm and it deals with financial decision making of the firm. Financial management includes any decision made by an investor that affects his finances. In financial management the emphasis is laid on optimum utilization of funds. Financial management is important to all levels of human existence as every entity has to look after its finances. Financial management is also referred as planning, organizing and controlling the monetary resources of an organization. Financial management helps in improving the allocations of working capital within business operations. It reviews the financial health of the company by using tools like ratio analysis. Scope/Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investments in current assets are also a part of investment decisions called as working capital decisions.

2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: 1. Dividend for shareholders- Dividend and the rate of it has to be decided. 2. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

6. A goal of the firm is the target against which a firms operating performance is measured. The goals serve as the point of reference to a decision maker. The objectives or goals of financial management are: 1. Profit Maximization.

2. Wealth Maximization. 3. Return Maximization. 7. 1. Profit Maximization: The objective of financial management is to earn maximum profits. Various important decisions are taken to maximize the profit of the firm. Profit maximization as an objective of financial management results in efficient allocation of resources. Companies collect their finance by issuing shares to the public. Investors also purchase shares in hope of getting good returns from the company in the form of dividend. If the company does not earn good profits and fails to distribute higher dividends, the people would not invest in such a company and people who have already invested will sell their stock. 8. 2. Wealth Maximization: The objective of wealth maximization of shareholders considers all future cash flows, dividends, earning per share, risk of a decision, etc. This goal directly affects the policy decision of the firm about what to invest in and how to finance these investments. Shareholders are always interested in maximization of wealth which depends upon the market price of the shares. Increase in market price lead to appreciation in shareholders wealth and vice versa. So the major goal of financial management is to maximize the market price of the equity shares of the company. 9. 3. Return Maximization: The third objective of financial management says to safeguard the economic interest of all the persons who are directly or indirectly connected with the company whether they are shareholders, creditors or employees. All these parties must also get maximum return on the investment and this can be possible only when the company earns higher profits to discharge its obligations to them.

Functions of Financial Management 1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. 3. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures

b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. 5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:

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Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.

b. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. 7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Functions of Financial Management Functions of financial management can be broadly divided into two groups. 1. Executive functions of financial management, and 2. Routine functions of financial management. This division of functions of financial management is depicted below. Eight executive functions of financial management (FM) are:1. Estimating capital requirements : The company must estimate its capital requirements (needs) very carefully. This must be done at the promotion stage. The company must estimate its fixed capital needs and working capital need. If not, the company will become over-capitalized or under-capitalized. 2. Determining capital structure : Capital structure is the ratio between owned capital and borrowed capital. There must be a balance between owned capital and borrowed capital. If the company has too much owned capital, then the shareholders will get fewer dividends. Whereas, if the company has too much of borrowed capital, it has to pay a lot of interest. It also has to repay the borrowed capital after some time. So the finance managers must prepare a balanced capital structure. 3. Estimating cash flow : Cash flow refers to the cash which comes in and the cash which goes out of the business. The cash comes in mostly from sales. The cash goes out for business expenses. So, the finance manager must estimate the future sales of the business. This is called Sales forecasting. He also has to estimate the future business expenses. 4. Investment Decisions : The business gets cash, mainly from sales. It also gets cash from other sources. It gets long-term cash from equity shares, debentures, term loans from financial institutions, etc. It gets short-term loans from banks, fixed deposits, dealer deposits, etc. The finance manager must invest the cash properly. Long-term cash must be used for purchasing fixed assets. Short-term cash must be used as a working capital. 5. Allocation of surplus : Surplus means profits earned by the company. When the company has a surplus, it has three options, viz., 1. It can pay dividend to shareholders. 2. It can save the surplus. That is, it can have retained earnings.

3. It can give bonus to the employees. 6. Deciding Additional finance: Sometimes, a company needs additional finance for modernisation, expansion, diversification, etc. The finance manager has to decide on following questions. 1. When the additional finance will be needed? 2. For how long will this finance be needed? 3. From which sources to collect this finance? 4. How to repay this finance?, Additional finance can be collected from shares, debentures, loans from financial institutions, fixed deposits from public, etc. 7. Negotiating for additional finance: The finance manager has to negotiate for additional finance. That is, he has to speak to many bank managers. He has to persuade and convince them to give loans to his company. There are two types of loans, viz., short-term loans and long-term loans. It is easy to get short-term loans from banks. However, it is very difficult to get long-term loans. 8. Checking the financial performance: The finance manager has to check the financial performance of the company. This is a very important finance function. It must be done regularly. This will improve the financial performance of the company. Investors will invest their money in the company only if the financial performance is good. The finance manager must compare the financial performance of the company with the established standards. He must find ways for improving the financial performance of the company. Routine Functions of Financial Management The routine functions are also called as incidental functions. Routine functions are clerical functions. They help to perform the Executive functions of financial management. Six routine functions of financial management (FM) are:1. 2. 3. 4. 5. 6. Supervision of cash receipts and payments. Safeguarding of cash balances. Safeguarding of securities, insurance policies and other valuable papers. Taking proper care of mechanical details of financing. Record keeping and reporting. Credit Management.

Financial planning:
In general usage, a financial plan is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan sometimes refers to an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate. In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A

financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company. Definition of Financial Planning Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise. Objectives of Financial Planning Financial Planning has got many objectives to look forward to: a. Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements. b. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term. c. Framing financial policies with regards to cash control, lending, borrowings, etc. d. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment. Importance of Financial Planning Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as1. Adequate funds have to be ensured. 2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained. 3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning. 4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company. 5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds. 6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern. Steps in Planning Function Planning function of management involves following steps:1. Establishment of objectives a. Planning requires a systematic approach. b. Planning starts with the setting of goals and objectives to be achieved. c. Objectives provide a rationale for undertaking various activities as well as indicate direction of efforts. d. Moreover objectives focus the attention of managers on the end results to be achieved. e. As a matter of fact, objectives provide nucleus to the planning process. Therefore, objectives should be stated in a clear, precise and unambiguous language. Otherwise the activities undertaken are bound to be ineffective.

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As far as possible, objectives should be stated in quantitative terms. For example, Number of men is working, wages given, units produced, etc. But such an objective cannot be stated in quantitative terms like performance of quality control manager, effectiveness of personnel manager. g. Such goals should be specified in qualitative terms. h. Hence objectives should be practical, acceptable, workable and achievable. Establishment of Planning Premises a. Planning premises are the assumptions about the lively shape of events in future. b. They serve as a basis of planning. c. Establishment of planning premises is concerned with determining where one tends to deviate from the actual plans and causes of such deviations. d. It is to find out what obstacles are there in the way of business during the course of operations. e. Establishment of planning premises is concerned to take such steps that avoids these obstacles to a great extent. f. Planning premises may be internal or external. Internal includes capital investment policy, management labour relations, philosophy of management, etc. Whereas external includes socio- economic, political and economical changes. g. Internal premises are controllable whereas external are non- controllable. Choice of alternative course of action a. When forecast are available and premises are established, a number of alternative course of actions have to be considered. b. For this purpose, each and every alternative will be evaluated by weighing its pros and cons in the light of resources available and requirements of the organization. c. The merits, demerits as well as the consequences of each alternative must be examined before the choice is being made. d. After objective and scientific evaluation, the best alternative is chosen. e. The planners should take help of various quantitative techniques to judge the stability of an alternative. Formulation of derivative plans a. Derivative plans are the sub plans or secondary plans which help in the achievement of main plan. b. Secondary plans will flow from the basic plan. These are meant to support and expediate the achievement of basic plans. c. These detail plans include policies, procedures, rules, programmes, budgets, schedules, etc. For example, if profit maximization is the main aim of the enterprise, derivative plans will include sales maximization, production maximization, and cost minimization. d. Derivative plans indicate time schedule and sequence of accomplishing various tasks. Securing Co-operation a. After the plans have been determined, it is necessary rather advisable to take subordinates or those who have to implement these plans into confidence. b. The purposes behind taking them into confidence are :i. Subordinates may feel motivated since they are involved in decision making process. ii. The organization may be able to get valuable suggestions and improvement in formulation as well as implementation of plans. iii. Also the employees will be more interested in the execution of these plans. Follow up/Appraisal of plans a. After choosing a particular course of action, it is put into action. b. After the selected plan is implemented, it is important to appraise its effectiveness. c. This is done on the basis of feedback or information received from departments or persons concerned. d. This enables the management to correct deviations or modify the plan. e. This step establishes a link between planning and controlling function. f. The follow up must go side by side the implementation of plans so that in the light of observations made, future plans can be made more realistic.

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Kinds of Financial Requirement: There are 2 bases on which financial requirements are decided. 1. Extend of performance: - Fixed Capital - Working capital (Circulating capital or revolving capital)

2. Period Of use: - Long Term - Short term - Medium term - Ownership capital - Borrowed Capital Estimation OF Asset: Assets A balance sheet has three kinds of assets: Signed, but not paid capital. Fixed assets. Current assets. Signed but not paid capital refers to receivables on future stockholders. Fixed assets Fixed assets are assets which are deemed to be used or owned for a long time in the company. All other assets - except signed but not paid capital - are current assets. It is the intention that is decisive. It may be necessary to reclassify an asset if the intention of the holding changes. In a situation where you conduct a reclassification you should mention this in the supplementary disclosures of the balance sheet. The exact demarcations between these different types of assets are not entirely clarified by the law. Acquisition value Fixed assets should be shown by the purchase price as a general rule; the amount should be equal to the expenditure of the asset acquisition or manufacture. If value-added enhancements such as increased standard measures are carried out, the expenditure can be included in the acquisition value. If capital is borrowed to finance the production of the asset the interest can be included, if the interest is related to production. Impairment of fixed assets If a fixed asset on the balance sheet date has a lower value than the purchase price minus depreciation, the asset should be reduced to a lower value, if the value endures. Revaluation of fixed assets

If the value of the asset rises, for example, because of increasing market prices, there is a certain amount of leeway for revaluing these assets. But you have to be cautious. Examples of relevant rules are: The valuation of the new higher value must be reliable The new higher value must be permanent The new value will substantially exceed the book value Intangible assets An intangible asset is an asset that has a lasting value for a company without being visible. It can be reprocessed by the company or purchased. An intangible asset can be: Goodwill Trademarks Expenditure on research and development Patents, licenses and trademarks Special rights to property Rights to special designs Intangible assets are valued on the basis of the purchase price. However, if the income of the expense is uncertain, it may not be recorded as an asset. The depreciation shall be a maximum of five years unless a different period of time with a reasonable degree of certainty can be established. Current assets Current assets are all other assets that are not counted as fixed assets. As the word implies, current assets are assets in daily usage in company operations. Current assets Acquisition value Current assets are valued according to the so-called minimum value principle. This means that access should be booked at the minimum of its acquisition value. The acquisition value of the current asset refers to the expense for buying or manufacturing the asset. This includes shipping, customs and other expenses. Current assets are divided into four types: Inventories Short-term receivables Short-term investments Cash and bank In real estate, it is mainly fuel oil that is accounted for in inventories. Even if you make a major purchase of refrigerators for future needs, they will be accounted as inventory availability. This requires that stock is inventoried at the end of the financial year. In real estate, valuation problems occurring with rent receivables are common. The rule of general concerns regarding the minimum value principle should be applied in these cases. Inventories Inventories are divided into five types: Raw materials and supplies Works in progress Commodities Ongoing work on behalf of others Advances to suppliers The kind of stock that the company holds naturally depends on the company's activity. An inventory includes only those goods that are meant to be sold not office supplies that are used within the company. An inventory has to be made as a basis for the stock. Short-term receivables Short-term receivables can be divided into different groups of

assets: Customer receivables Receivables from a group of company Receivables from associated companies Prepaid expenses and accrued income Short-term investments Short-term investments can be divided into three groups: Shares in a group of company Own stocks Other short-term investments Cash and bank assets Cash and bank assets can be divided into four groups: Checks Bills of exchange Payment cards from the bank and the post office Cash Cash and bank assets are the most volatile assets. Excessive cash in a limited company or an association might be an indication of prohibited loans or other irregularities. In an individual enterprise and in partnerships, however, it can be an advantage to have much cash on hand in case of incoming interest and/or to use for expansions. A minimum amount of cash may be an indication of unrecorded income.

Sources of Short-term Finance: The need for finance may be for long-term, medium-term or for short-term. Financial requirements with regard to fixed and working capital vary from one organisation to other. To meet out these requirements, funds need to be raised from various sources. Some sources like issue of shares and debentures provide money for a longer period. These are therefore, known as sources of long-term finance. On the other hand sources like trade credit, cash credit, overdraft, bank loan etc.which make money available for a shorter period of time are called sources of short-term finance. In this lesson you will study about the various sources of short-term finance and their relative merits and demerits. Purpose of Short-term Finance After establishment of a business, funds are required to meet its day to day expenses. For example raw materials must be purchased at regular intervals, workers must be paid wages regularly, water and power charges have to be paid regularly. Thus there is a continuous necessity of liquid cash to be available for meeting these expenses. For financing such requirements short-term funds are needed. The availability of short-term funds is essential. Inadequacy of short-term funds may even lead to closure of business. Short-term finance serves following purposes It facilitates the smooth running of business operations by meeting day to day financial requirements. 2. It enables firms to hold stock of raw materials and finished product. 3. With the availability of short-term finance goods can be sold on credit. Sales are for a certain period and collection of money from debtors takes time. During this time gap, production continues and money will be needed to finance various operations of the business. 4. Short-term finance becomes more essential when it is necessary to increase the volume of production at a short notice. 5. Short-term funds are also required to allow flow of cash during the operating cycle. Operating cycle refers to the time gap between commencement of production and realisation of sales. Sources of Short-term Finance

There are a number of sources of short-term finance which are listed Below: 1. Trade credit 2. Bank credit Loans and advances Cash credit Overdraft Discounting of bills 3. Customers advances 4. Installment credit 5. Loans from co-operatives 1. Trade Credit Trade credit refers to credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. Usually business enterprises buy supplies on a 30 to 90 days credit. This means that the goods are delivered but payments are not made until the expiry of period of credit. This type of credit does not make the funds available in cash but it facilitates purchases without making immediate payment. This is quite a popular source of finance. 2. Bank Credit Commercial banks grant short-term finance to business firms which is known as bank credit. When bank credit is granted, the borrower gets a right to draw the amount of credit at one time or in instalments as and when needed. Bank credit may be granted by way of loans, cash credit,overdraft and discounted bills. Loans When a certain amount is advanced by a bank repayable after a specified period, it is known as bank loan. Such advance is credited to a separate loan account and the borrower has to pay interest on the whole amount of loan irrespective of the amount of loan actually drawn. Usually loans are granted against security of assets. (ii) Cash Credit It is an arrangement whereby banks allow the borrower to withdraw money upto a specified limit. This limit is known as cash credit limit. Initially this limit is granted for one year. This limit can be extended after review for another year. However, if the borrower still desires to continue the limit, it must be renewed after three years. Rate of interest varies depending upon the amount of limit. Banks ask for collateral security for the grant of cash credit. In this arrangement, the borrower can draw, repay and again draw the amount within the sanctioned limit. Interest is charged only on the amount actually withdrawn and not on the amount of entire limit. (iii) Overdraft When a bank allows its depositors or account holders to withdraw money in excess of the balance in his account upto a specified limit, it is known as overdraft facility. This limit is granted purely on the basis of credit-worthiness of the borrower. Banks generally give the limit upto Rs.20,000. In this system, the borrower has to show a positive balance in his account on the last friday of every month. Interest is charged only on the overdrawn money. Rate of interest in case of overdraft is less than the rate charged under cash credit. (iv) Discounting of Bill Banks also advance money by discounting bills of exchange, promissory notes and hundies. When these documents are presented before the bank for discounting, banks credit the amount to cutomers account after deducting discount. The amount of discount is equal to the amount of interest for the period of bill. Customers Advances Sometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is quite large or things ordered are very costly. Customers advance represents a part of the payment towards price on the product (s) which will be delivered at a later date. Customers generally agree to make advances when such goods are not easily available in the market or there is an urgent need of goods. A firm can meet its short-term requirements with the help of customers advances. 4. Installment credit Installment credit is now-a-days a popular source of finance for consumer goods like television, refrigerators as well as for industrial goods. You might be aware of this system. Only a small amount of

money is paid at the time of delivery of such articles. The balance is paid in a number of instalments. The supplier charges interest for extending credit. The amount of interest is included while deciding on the amount of installment. Another comparable system is the hire purchase system under which the purchaser becomes owner of the goods after the payment of last instalment. Sometimes commercial banks also grant installment credit if they have suitable arrangements with the suppliers. 5. Loans from Co-operative Banks Co-operative banks are a good source to procure short-term finance. Such banks have been established at local, district and state levels. District Cooperative Banks are the federation of primary credit societies. The State Cooperative Bank finances and controls the District Cooperative Banks in the state. They are also governed by Reserve Bank of India regulations. Some of these banks like the Vaish Co-operative Bank was initially established as a co-operative society and later converted into a bank. These banks grant loans for personal as well as business purposes. Membership is the primary condition for securing loan. The functions of these banks are largely comparable to the functions of commercial banks. Merits and Demerits of Short-term Finance Short-term loans help business concerns to meet their temporary requirements of money. They do not create a heavy burden of interest on the organisation. But sometimes organisations keep away from such loans because of uncertainty and other reasons. Let us examine the merits and demerits of short-term finance. Merits of short-term finance a) Economical : Finance for short-term purposes can be arranged at a short notice and does not involve any cost of raising. The amount of interest payable is also affordable. It is, thus, relatively more economical to raise short-term finance. b) Flexibility : Loans to meet short-term financial need can be raised as and when required. These can be paid back if not required. This provides flexibility. c) No interference in management : The lenders of short-term finance cannot interfere with the management of the borrowing concern. The management retain their freedom in decision making. d) May also serve long-term purposes : Generally business firms keep on renewing short-term credit, e.g., cash credit is granted for one year but it can be extended upto 3 years with annual review. After three years it can be renewed. Thus, sources of short-term finance may sometimes provide funds for long-term purposes. Demerits of short-term finance Short-term finance suffers from a few demerits which are listed below: a) Fixed Burden : Like all borrowings interest has to be paid onshort-term loans irrespective of profit or loss earned by the organization. That is why business firms use short-term finance only for temporary purposes. b) Charge on assets : Generally short-term finance is raised on the basis of security of moveable assets. In such a case the borrowing concern cannot raise further loans against the security of these assets nor can these be sold until the loan is cleared (repaid). c) Difficulty of raising finance : When business firms suffer intermittent losses of huge amount or market demand is declining or industry is in recession, it loses its creditworthiness. In such circumstances they find it difficult to borrow from banks or other sources of short-term finance. d) Uncertainty : In cases of crisis business firms always face the uncertainty of securing funds from sources of short-term finance. If the amount of finance required is large, it is also more uncertain to get the finance. e) Legal formalities : Sometimes certain legal formalities are to be complied with for raising finance from short-term sources. If shares are to be deposited as security, then transfer deed must be prepared. Such formalities take lot of time and create lot of complications. Relative merits of Trade credit and Bank credit You have already read about trade credit and bank credit. You also know that trade credit is extended by the supplier for a limited period to facilitate purchases. Bank credit is obtained from banks and can be utilized for any purpose. The relative merits of trade credit and bank credit are as follows:a) Trade credit is available only with purchase of raw material or finished goods. It serves a limited purpose. But bank credit can be utilised by the borrower for any purpose that he may have in view.

b) In case of trade credit, payment has to be made after the expiry of credit period. However in case of bank credit (overdraft, cash credit, etc.) repayment after a certain period is not compulsory. The arrangement may be continued. c) No security is required to avail of trade credit. Banks generally ask for some security while advancing credit. d) Interest is not payable in case of trade credit, provided payments are made within the credit period. Interest has to be paid on bank credit in all circumstances. e) The terms and conditions of trade credit vary according to the custom and usage of trade. Bank credit is granted on the terms and conditions which generally are the same for all types of business.

Sources of Long-term Finance

As you are aware finance is the life blood of business. It is of vital significance for modern business which requires huge capital. Funds required for a business may be classified as long term and short term. You have learnt about short term finance in the previous lesson. Finance is required for a long period also. It is required for purchasing fixed assets like land and building, machinery etc. Even a portion of working capital, which is required to meet day to day expenses, is of a permanent nature. To finance it we require long term capital. The amount of long term capital depends upon the scale of business and nature of business. In this lesson, you will learn about various sources of long term finance and the advantages and disadvantages of each source. Objectives After studying this lesson, you will be able to: explain the meaning and purpose of long term finance; identify the various sources of long term finance; define equity shares and preference shares; distinguish between equity shares and preference shares; Explain the advantages and disadvantages of equity shares from the point of view of (a) shareholders and (b) management; define Debentures; enumerate the types of debentures; explain the merits and demerits of debentures as a source of long term finance; compare the relative advantages of issuing equity shares and debentures; explain the benefits and limitations of retained earnings; explain the merits and demerits of Public Deposits; outline the rules and regulations about inviting and accepting public deposits by companies; discuss the merits and demerits of long term borrowing from commercial banks.

A business requires funds to purchase fixed assets like land and building, plant and machinery, furniture etc. These assets may be regarded as the foundation of a business. The capital required for these assets is called fixed capital. A part of the working capital is also of a permanent nature. A fund required for this part of the working capital and for fixed capital is called long term finance. Purpose of long term finance: Long term finance is required for the following purposes: 1. To Finance fixed assets: Business requires fixed assets like machines, Building, furniture etc. Finance required to buy these assets is for a long period, because such assets can be used for a long period and are not for resale. 2. To finance the permanent part of working capital: Business is a continuing activity. It must have a certain amount of working capital which would be needed again and again. This part of working capital is of a fixed or permanent nature. This requirement is also met from long term funds.

Long Term Finance Its meaning and purpose

3. To finance growth and expansion of business: Expansion of business requires investment of a huge amount of capital permanently or for a long period. 4. Factors determining long-term financial requirements : The amount required to meet the long term capital needs of a company depend upon many factors. These are: (a) Nature of Business: The nature and character of a business determines the amount of fixed capital. A manufacturing company requires land, building, machines etc. So it has to invest a large amount of capital for a long period. But a trading concern dealing in, say, washing machines will require a smaller amount of long term fund because it does not have to buy building or machines. (b) Nature of goods produced: If a business is engaged in manufacturing small and simple articles it will require a smaller amount of fixed capital as compared to one manufacturing heavy machines or heavy consumer items like cars, refrigerators etc. which will require more fixed capital. (c) Technology used: In heavy industries like steel the fixed capital investment is larger than in the case of a business producing plastic jars using simple technology or producing goods using labour intensive technique. Sources of long term finance The main sources of long term finance are as follows: 1. Shares: These are issued to the general public. These may be of two types: (i) Equity and (ii) Preference. The holders of shares are the owners of the business. 2. Debentures: These are also issued to the general public. The holders of debentures are the creditors of the company. 3. Public Deposits: General public also like to deposit their savings with a popular and well established company which can pay interest periodically and pay-back the deposit when due. 4. Retained earnings: The company may not distribute the whole of its profits among its shareholders. It may retain a part of the profits and utilize it as capital. 5. Term loans from banks: Many industrial development banks, cooperative banks and commercial banks grant medium term loans for a period of three to five years. 6. Loan from financial institutions: There are many specialized financial institutions established by the Central and State governments which give long term loans at reasonable rate of interest. Some of these institutions are: Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India (UTI), and State Finance Corporations etc. These sources of long term finance will be discussed in the next lesson. Shares Issue of shares is the main source of long term finance. Shares are issued by joint stock companies to the public. A company divides its capital into units of a definite face value, say of Rs. 10 each or Rs. 100 each. Each unit is called a share. A person holding shares is called a shareholder. Characteristics of shares: The main characteristics of shares are following: 1. It is a unit of capital of the company. 2. Each share is of a definite face value. 3. A share certificate is issued to a shareholder indicating the number of shares and the amount. 4. Each share has a distinct number. 5. The face value of a share indicates the interest of a person in the company and the extent of his liability. 6. Shares are transferable units. Investors are of different habits and temperaments. Some want to take

Lesser risk and are interested in a regular income. There are others who may take greater risk in anticipation of huge profits in future. In order to tap the savings of different types of people, a company may issue different types of shares. These are: 1. Preference shares, and 2. Equity Shares. Preference Shares: Preference Shares are the shares which carry preferential rights over the equity shares. These rights are (a) receiving dividends at a fixed rate, (b) getting back the capital in case the company is wound-up. Investments in these shares are safe, and a preference shareholder also gets dividend regularly. Equity Shares: Equity shares are shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital. The equity shareholder gets dividend only after the payment of dividends to the preference shares. There is no fixed rate of dividend for equity shareholders. The rate of dividend depends upon the surplus profits. In case of winding up of a company, the equity share capital is refunded only after refunding the preference share capital. Equity shareholders have the right to take part in the management of the company. However, equity shares also carry more risk.

Following are the merits and demerits of equity shares: (a) Merits (A) To the shareholders: 1. In case there are good profits, the company pays dividend to the equity shareholders at a higher rate. 2. The value of equity shares goes up in the stock market with the increase in profits of the concern. 3. Equity shares can be easily sold in the stock market. 4. Equity shareholders have greater say in the management of a company as they are conferred voting rights by the Articles of Association. (B) To the Management: 1. A company can raise fixed capital by issuing equity shares without creating any charge on its fixed assets. 2. The capital raised by issuing equity shares is not required to be paid back during the life time of the company. It will be paid back only if the company is wound up. 3. There is no liability on the company regarding payment of dividend on equity shares. The company may declare dividends only if there are enough profits. 4. If a company raises more capital by issuing equity shares, it leads to greater confidence among the investors and creditors. Demerits: (A) To the shareholders 1. Uncertainly about payment of dividend: Equity share-holders get dividend only when the company is earning sufficient profits and the Board of Directors declare dividend. If there are preference shareholders, equity shareholders get dividend only after payment of dividend to the preference shareholders. 2. Speculative: Often there is speculation on the prices of equity shares. This is particularly so in times of boom when dividend paid by the companies is high. 3. Danger of overcapitalization: In case the management miscalculates the long term financial requirements, it may raise more funds than required by issuing shares. This may amount to over-capitalization which in turn leads to low value of shares in the stock market. 4. Ownership in name only: Holding of equity shares in a company makes the holder one of the owners of the company. Such shareholders enjoy voting rights. They manage and control the company. But then it is all in theory. In practice, a handful of persons control the votes and manage the company. Moreover, the decision to declare dividend rests with the Board of Directors. 5. Higher Risk:

Equity shareholders bear a very high degree of risk. In case of losses they do not get dividend. In case of winding up of a company, they are the very last to get refund of the money invested. Equity shares actually swim and sink with the company. B) To the Management 1. No trading on equity: Trading on equity means ability of a company to raise funds through preference shares, debentures and bank loans etc. On such funds the company has to pay at a fixed rate. This enables equity shareholders to enjoy a higher rate of return when profits are large. The major part of the profit earned is paid to the equity shareholders because borrowed funds carry only a fixed rate of interest. But if a company has only equity shares and does not have either preference shares, debentures or loans, it cannot have the advantage of trading on equity. 2. Conflict of interests: As the equity shareholders carry voting rights, groups are formed to corner the votes and grab the control of the company. There develops conflict of interests which is harmful for the smooth functioning of a company.

Difference between preference shares and equity shares : We have learnt the meaning and the feature of preference and equity shares. Now we can differentiate between the two. Basis of Preference Shares Equity shares difference 1. Choice It is not compulsory to It is compulsory to issue these shares. issue these shares. 2. Payment Dividend is paid on Dividend is paid on of dividend: these shares in these shares only preference to the after paying dividend equity shares. on preference shares. 3. Return In case of winding Capital on these shares of capital up of a company is refunded in case the capital is of winding up of refunded in the company after preference over refund of preference the equity shares. Share capital.

Commercial paper:
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.

ELIGIBILITY CRITERIA FOR ISSUING COMMERCIAL PAPER: A corporate would be eligible to issue CP provided 1. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore 2. company has been sanctioned working capital limit by banks or all-India financial institutions 3. The borrowal account of the company is classified as a Standard Asset by the financing banks/ institutions. Advantage of commercial paper: High credit ratings fetch a lower cost of capital. Wide range of maturity provides more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options. Disadvantages of commercial paper: Its usage is limited to only blue chip companies. Issuances of Commercial Paper bring down the bank credit limits. A high degree of control is exercised on issue of Commercial Paper. Stand-by credit may become necessary To summaries the above discussion on commercial paper CPs are issued by companies in the form of usance promissory note, redeemable at par to the holder on maturity. The tangible net worth of the issuing company should be not less than Rs.4 crores. Working capital (fund based) limit of the company should not be less than Rs.4 crores. Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or higher from any approved rating agencies and should be more than 2 months old on the date of issue of CP. Corporate are allowed to issue CP up to 100% of their fund based working capital limits. It is issued at a discount to face value. CP attracts stamp duty. CP can be issued for maturities between 15 days and less than one year from the date of issue. CP may be issued in the multiples of Rs.5 lakh. No prior approval of RBI is needed to issue CP and underwriting the issue is not mandatory. All expenses (such as dealers fees, rating agency fee and charges for provision of stand-by facilities) for issue of CP are to be borne by the issuing company

 TERM LOAN
Term loans are your basic vanilla commercial loan. They typically carry fixed interest rates, and monthly or quarterly repayment schedules and include a set maturity date. The range of funds typically available is $25,000 and greater. Bankers tend to classify term loans into two categories: Intermediate-term loans. Usually running less than three years, these loans are generally repaid in monthly installments (sometimes with balloon payments) from a business's cash flow. According to the American Bankers Association, repayment is often tied directly to the useful life of the asset being financed. Long-term loans. These loans are commonly set for more than three years. Most are between three and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry wording that limits the amount of additional financial commitments the business may take on (including other debts but also dividends or principals' salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan. Term loans are most appropriate for established small businesses that can leverage sound financial statements and substantial down payments to minimize monthly payments and total loan costs. Repayment is typically linked in some way to the item financed. Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing. The best use of a term loan is for construction; major capital improvements; large capital investments, such as machinery; working capital; purchases of existing businesses. Fortunately, the cost of such a loan is relatively inexpensive if the borrower can pass the financial litmus tests. Rates vary, making it worthwhile to shop, but generally run around 2.5 points over prime for loans of less than seven years and 3.0 points over prime for longer loans. Fees totaling up to 1 percent are common (though this varies greatly, too), with higher fees on construction loans. What do banks look for when making decisions about term loans? Well, the "five C's" continue to be of utmost importance. Character. How have you managed other loans (business and personal)? What is your business experience? Credit capacity. The bank will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay. Collateral. This is the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing. Capital. What assets do you own that can be quickly turned into cash if necessary? The bank wants to know what you own outside of the business-bonds, stocks, apartment buildings-that might be an alternate repayment source. If there is a loss, your assets are tapped first, not the bank's. Or, as one astute businessman puts it, "Banks like to lend to people who already have money." You will most likely have to add a personal guarantee to all of that, too. Comfort/confidence with the business plan. How accurate are the revenue and expense projections? Expect the bank to make a detailed judgment. What is the condition of the economy and the industry--hot, warm or cold?

Use the following guidelines when selecting a business bank:

Ask friends where they bank and if they are satisfied. Forge a relationship with a bank long before you will need a loan. You'll find out how they treat you. Get to know some folks at the bank on a first-name basis. Start building a relationship. Believe it or not, banks want to talk to you even if they cannot lend you money. Scan your newspaper for evidence of who is making the kinds of loans you are seeking. Not all banks can be the best at everything. Some are better at business loans; some are better with consumer deals. Visit two to four banks to find your fit. Be upfront; tell them you are considering a loan and that you are talking with other banks. Then listen to their pitch. Think about working through the SBA or other economic-development groups to secure better terms. They are not only for businesses that cannot get funding any other way.

Equipment Financing:
In order to start and sustain a business one needs finance. In the unit one on feasibility study, you have already seen the process of estimating financial requirements. The process involved (a) making a list of all the assets (b) identifying the sources of supply (c) estimating the cost of acquisition when the assets are to be acquired on outright basis. Then investment requirements as well as entrepreneurs fear will increase. To scare away the entrepreneurs fear, the emphasis should be given to resources and not to the ownership. In this unit we intend to familiarize you with some important financial innovations i.e., leasing Lease financing denotes procurement of assets through lease. The subject of leasing falls in the category of finance. Leasing has grown as a big industry in the USA and UK and spread to other countries during the present century. In India, the concept was pioneered in 1973 when the First Leasing Company was set up in Madras and the eighties have seen a rapid growth of this business. Lease as a concept involves a contract whereby the ownership, financing and risk taking of any equipment or asset are separated and shared by two or more parties. Thus, the lessor may finance and lessee may accept the risk through the use of it while a third party may own it. Alternatively the lessor may finance and own it while the lessee enjoys the use of it and bears the risk. There are various combinations in which the above characteristics are shared by the lessor and lessee. A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (thelessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Lease financing is based on the observation made by Donald B. Grant: Why own a cow when the milk is so cheap? All you really need is milk and not the cow. IMPORTANCE 0F LEASE FINANCING: Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee. The lessee does not have to pay the cost of asset at the time of signing the contract of leases. Leasing contracts are more flexible so lessees can structure the leasing contracts according to their needs for finance. The lessee can also pass on the risk of obsolescence to the lessor by acquiring those appliances, which have high technological obsolescence. To day, most of us are familiar with leases of houses, apartments, offices, etc. TYPES OF LEASE AGREEMENTS Lease agreements are basically of two types. They are (a) Financial lease and (b) Operating lease. The other variations in lease agreements are (c) Sale and lease back (d) Leveraged leasing and (e) Direct leasing.

Types of leases 1. Financial Lease: Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as capital lease. In India, financial leases are very popular with high-cost and high technology equipment 2. Operating lease: An operating lease stands in contrast to the financial lease in almost all aspects. This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period. Normally the lease is for a short period and even otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets. 3. Sale and lease back: It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. However, under this arrangement, the assets are not physically exchanged but it all happens in records only. This is nothing but a paper transaction. Sale and lease back transaction is suitable for those assets, which are not subjected depreciation but appreciation, say land. The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement. The sale and lease back transaction can be expressed with the help of the following figure. Under this transaction, the seller assumes the role of a lessee and the buyer assumes the role of a lessor. The seller gets the agreed selling price and the buyer gets the lease rentals. It is possible to structure the sale at agreed value (below or above the fair market price) and to adjust difference in the lease rentals. Thus the effect of profit/loss on sale of assets can be deferred. 4. Leveraged Financing: Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset. There are several extolled advantages of acquiring capital assets on lease: (1) SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories. (2) FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees. (3) PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets.

(4) IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique. Disadvantages: No Ownership The main disadvantage of leasing is that you never own the product. It remains the property of the leasing company during and after the lease. The only exception being if you arrange for it to be sold to another company or person, in which case the leasing company would receive the money and a percentage would be passed back to you (depending on the amount, product type, age, and which leasing company you use). As you do not own the product, you are unable to sell it in the event it is no longer needed, and you cannot upgrade to a newer or better product without either paying off the remaining contract, or paying a large fee to cancel the contract. You also need to carry on paying a smaller lease cost, even after the cost of the equipment has been fully covered. Hire purchase will allow you to own the product at the end of the agreement, but this is normally more difficult to arrange, and is often available only on highly costly items. Long Term Expense Although leasing allows you to avoid paying a large lump sum, over a long period of time it often works out considerably more expensive. Over the course of a standard lease, you pay the cost of the equipment as well as the leasing companies charges. After the lease finishes you need to carry on paying rental to use the product (although after the initial lease the cost of rental goes down significantly). This means that over a number of years, you will pay considerably more than the actual cost of the equipment without ever actually owning it. Maintenance Although you do not own the equipment that you lease, you are still responsible for its maintenance and repair. Unless you have specifically trained employees to fix the equipment, then this could prove very costly in the event of a serious fault. Some leasing companies will allow you to cover the maintenance and repair costs for an extra sum (which is added to the monthly leasing cost). This will increase your monthly payments, but may save you money in the long run; particularly with manual or highly technical products that may go wrong frequently, and may cause severe disruption if out of action. Cover is normally through the leasing company itself, or through a separate insurance policy. Car leasing is slightly different, as many of these agreements include basic maintenance.

Corporate finance:
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value.[1] Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers) The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs. Thus, the

terms corporate finance and corporate financier may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses.

Corporate finance is the funding provided to support the operations of the venture itself, as distinct from project finance which is provided for developing and producing individual film projects. The main sources of corporate finance are: Debt: money borrowed from a lender and secured against certain assets of the company in return for a promise to pay interest on the outstanding amount and to repay the principal of the loan on or before an agreed date. The rate of interest charged will usually depend upon the term of the loan and whether the principal is to be paid in installments throughout the term or in a lump sum payment at the agreed maturity date. Lenders tend to be risk averse and are looking for solid evidence of the lenders ability to re-pay the interest and principal as agreed. They should be kept informed at all times of any issues relating to the ability of the company to repay the debt. Equity: shares in the ownership of the company acquired at the risk of the purchaser and not secured on the company's assets; any return will be in the form of a share of the profits made by the company. Equity investors will want to be assured that the company has solid growth prospects and a sound business plan (see below). They will also need to see a clear exit strategy explaining how they will recoup their investment (and ideally a significant profit) in due course. Quasi-equity: other forms of shares such as preference shares and convertible shares which pay a fixed dividend but do not convey any voting or management rights on the owner. Convertible shares can be exchanged for ordinary voting shares subject to certain conditions specific to each investment situation. Other funding: for example central government grants or other local support funds to encourage investment in a particular sector or location. Each of these sources of funding has a different risk and return profile. The greater the risk carried by the financier, the higher the return that they should receive for committing their funds. Equity investors will seek a greater return than lenders because of the greater risk that they carry.

Approaching Banks and Financiers The key to unlocking any finance, be it debt or equity, is to have a good business plan. The business plan is the document that will explain to the potential backer what the company does and what its future prospects are. The main elements of a good business plan are: a statement of the company's goals and its strategy for achieving them a clear description of what the funding is required for and how it will be put to use the track records of the main players involved in running the company, giving a clear indication of why they believe they can deliver the results set out in the plan cash flow and profit projections with an explanation of the assumptions on which they are based and an analysis of what the company will do if the actual figures fail to meet these projections an exit strategy and repayment plan showing how the financier will get their money out of the company again at the end of the loan or investment period

Of these elements, the two that carry the most weight with financiers are the credibility and track records of the key players - can the backers be confident that these people can deliver the plan? and the cash flow forecast - are the figures realistic and achievable? Will the company generate

enough cash to meet its interest repayments and run its operations? The Time Value of Money Future cash flows are worth less than current cash flows. This is partly because they are more uncertain but also because the actual value of money declines with time due to the impact of future inflation on the purchasing power of the cash and the fact that cash received today can be invested and earn interest. In order to account for the time value of money, future cash flows should be discounted back to their present day value when evaluating business plans and investment proposals. Investors will apply a discount rate to future income flows based on their current risk free rate of interest (i.e. the amount that they can earn on their cash without taking any risk whatsoever) plus a premium to cover the risk of the venture. The present value of the investment can then be calculated by converting all of the future cash flows back to present day values using the discount rate. To arrive at the net present value of the investment, the original investment amount should be deducted from the present value. Investors will also calculate the Internal Rate of Return (IRR) for an investment by calculating the discount rate required to give a net present value of zero. The IRR can be used as a way of evaluating the riskiness and likely return from a number of different investment opportunities to determine which, if any, are worth pursuing, or to set a "hurdle rate" of return required from any investment that they make.

Corporate Finance Options Available The range of financing options will generally depend on the length of time for which the finance is required. Short term (less than one year): bank overdraft trade credit discounted receivables (ie. selling the company's outstanding debts to a third party at a discount to their full value)

Medium term (one to five years) bank loans EU funding overhead or first look deal with another company state funding

Longer term (over five years) private equity public equity (ie. through an initial public offering on one of the recognised stock exchanges) convertible debt loan stock with warrants (which can be converted into shares) grants

Fiscally supported funding, such as the Enterprise Investment Scheme which gives tax benefits to private investors to encourage them to back smaller companies. Some other Sources: - Angel investor - Incubator - Private equity player - Venture capital fund -Microfinance Top Tips Corporate finance is the funding provided to support the operations of the venture itself, as distinct from project finance which is provided for developing and producing individual film projects The main sources of corporate finance are debt and equity. Different types of financing might be more appropriate to meet the short, medium and long-term needs of the company The main sources of corporate finance are debt and equity. Different types of financing might be more appropriate to meet the short, medium and long-term needs of the company Future cash flows are worth less than current cash flows because money loses value over time. Financiers discount future income to work out the net present value of investment opportunities and to provide a way of comparing different, and possibly competing, projects