TABLE OF CONTENT

S. No. Topic Page no.

1 Task 1: Introduction to Sources of Finance with 2
Advantages and Disadvantages
2 Task:2 Cost of Finance 8
3 Importance of Finance in Financial Planning 9
4 Impact of Financing on Financial statements 10
5 Task 3: Viability of Financial Decision 11
6 Task 4: Projected Profit and Loss account for five 12
years
7 Conclusion 13
8 References 14

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INTRODUCTION
In our present day economy, finance is defined as the provision of money at the time
when it is required. Every enterprise, whether big, medium or small, needs finance
to carry on its operations and to achieve its targets. In fact, finance is so
indepensible today that it is rightly said that it is the life blood of an enterprise.
The various sources of finance can be long term and short term.

SOURCES OF FINANCE
A. LONG TERM FINANCE
A business requires funds to purchase fixed assets like land and building, plant and
machinery, furniture etc. The capital required for these assets is called fixed capital.
A part of the working capital is also of a permanent nature. Funds required for this
part of working capital and for fixed capital is called long term finance.

(A) 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.

MERITS

(A) To the Shareholders

1. In case there are good profits, the company pays dividend to the equity
shareholders at a higher rate.

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 2. The value of equity shares goes up in the stock market with the increase in
profits of the concern.
3. 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.
3. There is no liability on the company regarding payment of dividend on
equity shares.

DEMERITS

(A) To the shareholders

1. Equity share-holders get dividend only when the company is earning
sufficient profits and the Board of Directors declare dividend
2. 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.

B) To the Management
1. 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.

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(B) DEBENTURES

Whenever a company wants to borrow a large amount of funds for a long but fixed
period, it can borrow from the general public by issuing loan certificates called
debentures.

MERITS
1. Since debentures are ordinarily issued for a fixed period, the company can
make the best use of the money. It helps long term planning

2. Interest paid on debentures is treated as an expense and is charged to the

profits of the company. The company thus saves income-tax.
3. On winding up of the company, they are repayable before any payment is
made to the shareholders.

DEMERITS
1. As the interest on debentures have to be paid every year whether there are
profits or not, it becomes burdensome in case the company incurs losses.
2. During depression the profits of the company decline. It may be difficult to
pay interest on debentures. As interest goes on accumulating, it may lead to
the closure of the company.

(C) RETAINED EARNINGS

Companies set aside a part of their profits to meet future requirements of capital.
Companies keep these savings in various accounts such as General Reserve,
Debenture Redemption Reserve and Dividend Equalization Reserve etc. These
reserves can be used to meet long term financial requirements. The portion of the
profits which is not distributed among the shareholders but is retained and is used in

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business is called retained earnings.

MERITS
1. No expenses are incurred when capital is available from this source.
2. A company which has enough reserves can face ups and downs in business.
Such companies can continue with their business even in depression, thus
building up its goodwill.
DEMERITS
1. This method of financing is possible only when there are huge profits and
that too for many years.
2. Through ploughing back of profits, companies increase their financial
strength.
(D) BORROWING FROM COMMERCIAL BANKS

Commercial banks have started giving loans for a long period. Commercial banks
give
term loans i.e. for more than one year. Commercial banks provide long term finance
to small scale units in the priority sector.

MERITS
1. It is a flexible source of finance as loans can be repaid when the need is met.
2. Finance is available for a definite period, hence it is not a permanent burden
3. Banks keep the financial operations of their clients secret.
4. Less time and cost is involved as compared to issue of shares, debentures
etc.
5. Banks do not interfere in the internal affairs of the borrowing concern, hence
the management retains the control of the company.

DEMERITS

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 1. Banks require personal guarantee or pledge of assets and business cannot
raise further loans on these assets.
2. In case the short term loans are extended again and again, there is always
uncertainty about this continuity.
3. Too many formalities are to be fulfilled for getting term loans from banks.

B. SHORT TERM FINANCE

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. Short
term finance is required even for day to day activities of the concern.

(A) 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.

(B) BANK CREDIT

Commercial banks grant short-term finances to 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

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by way of loans, cash credit, overdraft and discounted bills.

1) 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.

2) Cash Credits
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.

3) 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. Interest is charged only on
the overdrawn money. Rate of interest in case of overdraft is less
than the rate charged under cash credit.

4) Discounting of Bill
Banks also advance money by discounting bills of exchange,
promissory notes and hundies. When these documents are presented

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 before the bank for discounting, banks credit the amount to
customer’s account after deducting discount. The amount of discount
is equal to the amount of interest for the period of bill.

(C) 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 generally agree to make advances when such
goods are not easily available in the market or there is an urgent need of goods.

(D) INSTALMENT CREDIT

Instalment credit is now-a-days a popular source of finance for consumer
goods like television, refrigerators as well as for industrial goods. Only a
small amount of money is paid at the time of delivery of goods. 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
instalment.

MERITS OF SHORT TERM FINANCE

1. 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.

2. Flexibility: Loans to meet short-term financial need can be raised as and

when required. These can be paid back if not required.

DEMERITS OF SHORT TERM FINANCE

1. Fixed Burden: Like all borrowings interest has to be paid on short-term

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 loans irrespective of profit or loss earned by the organization.

2. Charge on assets: Generally short-term finance is raised on the basis of

security of moveable assets.

3. 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.

COST OF FINANCE

Market value of equity = 600 million

Cost of equity (in %) = 11%
Cost of equity = 600million*11/100
= 66 million

Market value of debt = 150million

Cost of debt(before tax)= 8.6%
Cost of debt(after tax) = 6.02%

Cost of debt = 150million*6.02/100

= 9.03 million

Total cost of capital = 66million+9.03million *100

600million+150million
= 10%

IMPORTANCE OF FINANCE IN FINANCIAL PLANNING

Finance is the life blood of business. Business finance has been defined as those

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activities which have to do with the provision and management of funds for the
satisfactory conduct of a business. Business finance is defined as that business
activity which is concerned with the acquisition and conservation of capital funds in
meeting the financial needs and overall objectives of business enterprise.
Financial planning is a process which presents before an individual, organization or
even a country, the current financial position and the adjustments in the spending
pattern, in order to meet the goals. It is important to plan finances in order to reap
long term benefits through the assets in hand. Finance is very important in financial
planning.

1. Cash Flow: Financial planning helps in increasing cash flow as well as

monitoring the spending pattern. The cash flow is increased by undertaking
measures such as tax planning, prudent spending and careful budgeting.
2. Capital: A strong capital base can be built with the help of efficient financial
planning. Thus, one can think about investments and thereby improve his
financial position.
3. Income: It is possible to manage income effectively through planning.
Managing income helps in segregating it into tax payments, other monthly
expenditures and savings.
4. Investment: A proper financial plan that considers the income and
expenditure of a person, helps in choosing the right investment policy. It
enables the person to reach the set goals.
5. Savings: It is good to have investments with high liquidity. These
investments, owing to their liquidity, can be utilized in times of emergency
and for educational purposes.

IMPACT OF FINANCING ON FINANCIAL STATEMENTS

Financial statement generally refers to two statements that are profit & loss account
and balance sheet. These statements are used to convey to management and other
interested outsiders the profitability and financial position of the organization. There

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are various elements in profit & loss account and balance sheet. Elements of balance
sheet are share capital, reserves and surplus, loans and current liabilities and
provisions on the liabilities side and fixed assets, investments, current assets and
other expenditure on the asset side. Income statement of the concern helps to know
gross profit and net profit to the concern.

If a company raises money through shares whether through equity or preference

then its capital on the liabilities side will increase and it has to pay dividend on this
capital so its net profit after dividend and tax will decrease. And if retained earnings
are used to expand the business, then retained earnings shown on the liabilities side
will be low. Company can also expand its activities by raising loan whether secured
or unsecured and these loans come on the liability side and interest is to be paid on
them which is deducted from the gross profit of the concern. If a company has
created some provisions like provision for taxation, provision for contingencies,
other provisions etc then its total liabilities will increase and they are deducted from
the gross profits.

This is the impact of financing on the financial statement and profit and loss account
of the organization. Every organization prepares these two accounts to know their
profitability and to know about the financial position. The financial statement is
very useful for assessing the efficiency for different cost centres. Even a banker is
interested to see that the loan amount is secure and the customer is able to pay the
interest regularly. The financial statements are very much useful for management,
creditors, bankers, investors, Government etc.

VIABILITY OF FINANCIAL DECISION

Viability of financial decision can be checked through investment appraisal
techniques. Most common technique used is NPV method.

PROJECTED NET PRESENT VALUE

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 Inflow Present value @10% discount Present Value
Years s Factor Rs(000)
45360
1 0 0.909 412322
54432
2 0 0.826 449608
65318
3 4 0.751 490541
78382
4 1 0.683 535350
94058
5 5 0.621 584103
Present value of all Cash Inflows 2471924
Less Present Value of Initial
Investment 100000
Net Present Value 2371924
As we get here positive NPV, so the project is viable.

ADVANTAGES OF NPV METHOD

The advantages of Net Present Value method of evaluating investment proposals
are as follows.
 It recognizes the time value of money and is suitable to be applied in a
situation with uniform sach outflows and uneven cash inflows or cash flows
at different periods of time.
 It takes into account the earnings over the entire life of the project and the
true profitability of the investment proposal can be evaluated.
 It takes into consideration the objective of maximum profitability.

DISADVANTAGES OF NET PRESENT VALUE METHOD

The NPV method suffers from the following limitations:
 As compared to the traditional methods, the NPV method is more difficult to
understand and operate.
 Ir may not give good results while comparing projects with unequal lives.
 In the same way as above, it may not give good results while comparing
projects with unequal investments of funds.

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  It is not easy to determine an appropriate discount rate.

PROJECTED PROFIT AND LOSS ACCOUNT

Working Notes:
 Revenue increased as per number of stores increased every year i.e by 20%
(14/70 * 100)
 Administrative and selling expenses are divided into fixed and variable
expenses i.e 65% fixed and 35% Variable.
 Other expenses are divided into fixed and variable expenses i.e 45% fixed
and 55% Variable.
 Fixed expenses increases as per inflation rate i.e 5% and variable expenses
increases as per number of stores increased every year.
 Rental expenses increased by 20% every year.
 Depreciation is charged @25% on written down value basis.

CONCLUSION

To conclude we may say that JS and company is very good company. The company
is planning to expand its business and presents very good strategy for the next five
years. The projected Net Present Value shows that project is exceptionally good and

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viable so company must go ahead. The projected profit and loss account for next
five years shows a very good profit so company is going in right direction and
should make the further investment of 100 million.

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 REFRENCES:

 http://www.nos.org/srsec319/319-18.pdf
 http://www.nios.ac.in/srsec319/319-19.pdf
 www.buzzle.com/.../importance-of-financial-planning.html
 resources.bnet.com/.../finance+and+financial+statements+and+performance
+management.html
 en.wikipedia.org/wiki/Financial_statement –
 en.wikipedia.org/wiki/Financial_statement –

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