CONCEPT OF BUSINESS FINANCE:
The term finance means money or fund. The requirements of funds by business to carry out its
various activities is called business finance. Finance is needed at every stage in the life of a
business. A business cannot function unless adequate funds are made available to it.
NEED OF BUSINESS FINANCE:
1. Fixed Capital Requirement: In order to start a business, funds are needed to purchase fixed
assets like land and building, plant and machinery.The funds required in fixed assest remain
invested in the business for a long period of time.
2. Working Capital Requirement: A business needs funds for its day to day operation. This is
known as working Capital requirements. Working capital is required for purchase of raw
materials, to pay salaries, wages, rent and taxes.
3. Diversification: A company needs more funds to diversify its operation to become a multi-
product company e.g. ITC.
4. Technology upgradation: Finance is needed to adopt modern technology for example uses of
computers in business.
5. Growth and expansion: Higher growth of a business enterprise requires higher investment in
fixed assets. So finance is needed for growth and expansion.
CLASSIFICATION OF SOURCE OF FUNDS
, METHODS OF RAISING FINANCE:
Issue of Share: The capital obtained by issue of shares is known as share capital. The capital of a
company is divided into small units called share. If acompany issue 10,000 shares of Rs. 10/-
each then the share capital of company is 1,00,000. The person holding the share is known as
shareholder. There are two types of share (I) Equity share (II) preference share.
(a) Equity Share: Equity shares represent the ownership of a company. They have right to vote
and right to participate in the management.
ADVANTAGES/MERITS:
1. Permanent Capital: Equity share capital is important source of finance for a long term.
2. No charge on assets: For raising funds by issue of equity shares a company does not need to
mortgage its assets.
3. Higher returns: Equity share holder get higher returns in the years of high profits.
4. Control: They have right to vote and right to participate in the management.
5. No burden on company: Payment of equity dividend is not compulsory.
LIMITATIONS/DEMERITS:
1. Risk: Equity shareholder bear higher risk because payment of equity dividend is not
compulsory.
2. Higher Cost: Cost of equity shares is greater than the cost of preference share.
3. Delays: Issue of Equity shares is time consuming.
4. Issue depends on Share Market Conditions: Equity Shareholders are the primary risk bearer
therefore the demand of equity shares is more in the boom time.
(b) Preference Share – Preference shares are considered safer in investment. (as compare to
equity shares) They receive dividend at a fixed rate. Preference shareholder are like creditors.
They have no voting right.
Types of preference shares:
1. Cumulative preference shares.
2. Non cumulative preference shares.
3. Participating preference shares.
4. Non participating preference shares.
5. Convertible preference shares.
6. Non Convertible preference shares.
MERITS OF PREFERENCE SHARES:
1. Investment is safe: Preference shareholders investment is safe. They have preferential right
to claim dividend and capital.
2. No Charge on assets: The company does not need to mortgage its assets for issue of
The term finance means money or fund. The requirements of funds by business to carry out its
various activities is called business finance. Finance is needed at every stage in the life of a
business. A business cannot function unless adequate funds are made available to it.
NEED OF BUSINESS FINANCE:
1. Fixed Capital Requirement: In order to start a business, funds are needed to purchase fixed
assets like land and building, plant and machinery.The funds required in fixed assest remain
invested in the business for a long period of time.
2. Working Capital Requirement: A business needs funds for its day to day operation. This is
known as working Capital requirements. Working capital is required for purchase of raw
materials, to pay salaries, wages, rent and taxes.
3. Diversification: A company needs more funds to diversify its operation to become a multi-
product company e.g. ITC.
4. Technology upgradation: Finance is needed to adopt modern technology for example uses of
computers in business.
5. Growth and expansion: Higher growth of a business enterprise requires higher investment in
fixed assets. So finance is needed for growth and expansion.
CLASSIFICATION OF SOURCE OF FUNDS
, METHODS OF RAISING FINANCE:
Issue of Share: The capital obtained by issue of shares is known as share capital. The capital of a
company is divided into small units called share. If acompany issue 10,000 shares of Rs. 10/-
each then the share capital of company is 1,00,000. The person holding the share is known as
shareholder. There are two types of share (I) Equity share (II) preference share.
(a) Equity Share: Equity shares represent the ownership of a company. They have right to vote
and right to participate in the management.
ADVANTAGES/MERITS:
1. Permanent Capital: Equity share capital is important source of finance for a long term.
2. No charge on assets: For raising funds by issue of equity shares a company does not need to
mortgage its assets.
3. Higher returns: Equity share holder get higher returns in the years of high profits.
4. Control: They have right to vote and right to participate in the management.
5. No burden on company: Payment of equity dividend is not compulsory.
LIMITATIONS/DEMERITS:
1. Risk: Equity shareholder bear higher risk because payment of equity dividend is not
compulsory.
2. Higher Cost: Cost of equity shares is greater than the cost of preference share.
3. Delays: Issue of Equity shares is time consuming.
4. Issue depends on Share Market Conditions: Equity Shareholders are the primary risk bearer
therefore the demand of equity shares is more in the boom time.
(b) Preference Share – Preference shares are considered safer in investment. (as compare to
equity shares) They receive dividend at a fixed rate. Preference shareholder are like creditors.
They have no voting right.
Types of preference shares:
1. Cumulative preference shares.
2. Non cumulative preference shares.
3. Participating preference shares.
4. Non participating preference shares.
5. Convertible preference shares.
6. Non Convertible preference shares.
MERITS OF PREFERENCE SHARES:
1. Investment is safe: Preference shareholders investment is safe. They have preferential right
to claim dividend and capital.
2. No Charge on assets: The company does not need to mortgage its assets for issue of
