Professional Documents
Culture Documents
Without availabil
ity of proper funds a company cannot run smoothly even for a single day. Therefo
re to manage funds effectively and efficiently is very important. Every decision
with regard to finance should be taken in a very professional manner. Actually
it is team efforts and thus coordination is very important. While making finance
planning following points should be considered: -
1. What is profit margin of the company? Whether it is appropriate enough t
o bear the burden of cost of capital i.e. Interest and other incidental expenses
.
2. If the margin is not appropriate then how we can reduce the cost.
3. Explore the possibility of reducing the inventory holding cost and colle
ction period. Normally a large part of funds blocked in dead inventory and debto
rs.
4. How we can improve the efficiency of the use of fixed assets. e.g. new t
echnology may be adopted to increase the efficiency of plant and machinery.
5. Company should explore what is the best option for raising the funds. Fo
llowing are the options available: -
Raising funds through Equity:
Public Limited Company normally prefers raising of funds through equity because
of the following reasons:
(i) Funds raised through Equity represent permanent capital there is no liab
ility for repayment.
(ii) It is up to the company to pay dividend or not. Thus it does not involve an
y fixed obligation.
(iii) It enhances the creditworthiness of the company. Larger the capital base,
higher the ability of the company to obtain credit.
(iv) Normally the companies raises funds through equity to fulfill its long term
funds requirements, Expansion plans or major changes in technical know how etc.
If the same funds are raised through Loan or debenture, the company will have t
o pay a very heavy interest and it will not be economical in the long run.
For the investors they have the controlling power, increase in their wealth as t
he share market is booming and the dividend received by them is exempt under the
income tax Act, 1961.
On the other hand raising funds through equity is not an easy option for small
or medium scale organization. Company will have to fulfill the requirement of SE
BI, which is now a day is very strict and even the top listed companies have to
face the problems. The goodwill of the company, its past performance particularl
y the financial results, the major stake holders of the company, the business of
the company, possibility of future growth are the major points that the finance
department must consider before going for the public issue.
According to Tondon Committee Report, the commercial Banks must follow the follo
wing three methods to supervise credit from the point of view of ensuring proper
end use of funds and keeping a watch on safety of services.
1. As per the first method of lending, the borrower is required to bring in
min Net Working Capital to the extent of 25% of WCG. The balance, which is maxi
mum 75% of the WCG, will be the MPBF.
Total Current Assets: Rs.4000
Less Current Liability Rs1000
Working Capital Gap Rs3000
Less 25% from long term sources: Rs.750
Maximum permissible bank borrowings: Rs.2250/-
2. As per the second method of lending, the borrower is required to bring m
inimum NWC to the extent of 25 % of the total current assets & the balance the M
PBP.
Total Current Assets: Rs.4000
Less Current Liability Rs1000
Working Capital Gap Rs3000
Less 25% of CA from long-term sources: Rs.1000/-
Maximum permissible bank borrowings: Rs.2000/-
3. As per the third method the borrower contribution from long term funds w
ill be to the extent of 25% of the balance current asset, thus strengthening the
current ration further.
Total Current Assets: Rs.4000
Less Core Current Assets: Rs.500
Total Balance Current Asset: Rs.3500
Less 25% of CA from long-term sources: Rs.875/-
Balance Current Assets: Rs.2625/-
Less Current Liability Rs1000/-
Maximum permissible bank borrowings: Rs.1625/-