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Class 11 Sources of Business Finance: cheat sheet
CBSE Business Studies. Why business needs funds, how sources are classified, and the main ones: retained earnings, trade credit, factoring, leasing, public deposits, commercial paper, shares, debentures, banks and GDRs.
Key ideas
- Business needs funds for fixed capital (long-term assets) and for working capital (day-to-day running).
- Sources are classified by period (long term is over five years), by ownership (owner’s funds and borrowed funds) and by source of generation (internal and external).
- Owner’s funds (equity shares, retained earnings) need no repayment while the firm lasts; borrowed funds (debentures, loans, public deposits) carry interest and must be repaid.
- Equity shareholders are the real owners: their dividend varies with profit and is paid last; preference shareholders get a fixed dividend before them.
- Debenture holders are creditors: their fixed interest must be paid even in a year of loss, and it is tax deductible.
- Short-term sources include trade credit, factoring (a factor collects the firm’s receivables), commercial paper (an unsecured short-term note) and bank credit.
- Lease financing gives the use of an asset for a rent; GDRs and ADRs raise capital abroad through depository receipts.
- The choice of source depends on cost, risk, control, purpose and period, flexibility, financial strength and tax benefits.
Remember
| Debenture interest | number × face value × rate ÷ 100 |
| Preference dividend | number × face value × rate ÷ 100, paid before any equity dividend |
| Equity dividend received | shares held × face value × dividend% ÷ 100 |
| Left for shareholders (before tax) | earnings before interest − debenture interest |
| Factor’s advance | receivables × advance% ÷ 100 |
| After the factor’s commission | debts collected − commission% of the debts |
| Shares vs debentures | ownership vs loan; varying dividend vs fixed interest; voting rights vs none; repaid on winding up vs after a fixed period |
Watch out
- Paying debenture interest only in profitable years: it is due even in a loss.
- Calling debenture holders owners of the company: they are creditors.
- Working out a dividend on the number of shares alone, without multiplying by the face value.
Worked example
A company has 37,000 debentures of ₹100 each at 8% interest. This year it earns ₹740,000 before interest. (a) How much interest is due? (b) What is left for shareholders before tax?
Working: 37,000 × 100 × 8/100; 740,000 − 296,000
Answer: (a) ₹296,000; (b) ₹444,000
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