Business Studies for Class 11 Chapter 8 Sources of Business Finance

Learn CBSE Business Studies Index Terms for Class 11, Chapter 8 Including Definitions and Meanings

1. Fixed Capital – Fixed capital is the part of a company’s overall capital outlay spent on physical assets like plants, automobiles, and equipment that remain in the company for more than one accounting cycle, or more technically, forever. A company can buy and own fixed assets, and they can be arranged as a long-term leases.

In other words, Fixed capital is assets of a business that are permanent in nature and are not intended to be disposed of by a business. These assets include land, buildings, plant, machinery, fixed equipment, furniture, fixtures, vehicles, livestock, etc., which are held and used by a business to directly or indirectly generate revenue.

2. Finance – Business finance is the funds required to establish, operate business activities, and expand in the future. Funds are specifically required for various purchase types of tangible assets such as furniture, machinery, buildings, offices, factories, or intangible assets like patents, technical expertise, trademarks, etc.

Apart from the assets mentioned above, other things that require funding are the day-to-day operational activities of a business. This activity includes purchasing raw materials, paying salaries, and bills, collecting money from clients, etc. It is essential to have a sufficient amount of money to survive and grow the business.

3. Owned Capital – This fund is financed by the company owners, also known as the owner’s capital. The capital is raised by issuing preference shares, retained earnings, equity shares, etc. These are for long-term capital funds, which form a base for owners to obtain their right to control the firm’s management and operations. Owned capital is considered permanent capital and hence, is returned to its owners at the dissolution or liquidation of the company.

In other words, the owner’s funds are the total amount invested by the owner of an enterprise and the accumulated profits that they have reinvested in the business. This money remains invested in the business till the company winds up its operations. It is the primary source of funds, without which it is difficult for any organisation to survive in the market. The owner may be an individual, a group of partners, or shareholders in the business. The capital invested by the owner/s allows them control over their business. Some entrepreneurs may prefer to keep the control of the company to themselves, while others may opt for sharing the control and risk of a business by bringing in other investors.

4. Working Capital – The working capital requirement can be depicted as how much cash a firm would have to overcome any issues between its accounts receivable and accounts payable. It is basically the sum a business expects to keep its activities afloat.

In other words, the working capital, also known as net worth capital, is the money that a company needs to manage its short-term expenses. It is calculated as a difference between an organisation’s current assets and its current liabilities. Working capital is a measure of the operational efficiency, liquidity, and short-term financial health or solvency of the company.

The worthiness of an organisation’s working capital is subject to the industry in which it engages and its link with its suppliers and customers.

5. Borrowed Capital – The borrowed capital is the funds accumulated with the help of borrowings or loans for a particular period of time. This source of funds is the most common and popular amongst businesses. For example, loans from commercial banks and other financial institutions.

The borrowed funds are the funds that a business raises through loans or borrowings from other parties. They are the most common sources of capital for any enterprise. Some of the methods of raising borrowed funds are raising loans from commercial banks or other financial institutions, issuing debentures and bonds, public deposits, and trade credit.

The creditors provide these funds only for a specified period of time, and they have to return after the expiry of that period. A business can avail of these funds only under certain terms and conditions, which they need to fulfil at all costs. The borrowers must also pay a fixed amount of interest on these funds to the lenders, irrespective of whether the firm is making a profit or not. The creditors give these funds on the security of assets of the firm in most cases.

6. Short-term Sources – The sources of funds required by a company include those sources which are required by business firms for a period of less than 1 year. For example, trade credit and commercial papers.

7. Long-term Sources – The long-term sources of funds required by a company are those sources that are required by the business firms for a period exceeding 5 years. For example, shares and debentures.

8. Restrictive Conditions – A restricted condition is a fund in a reserve account that contains cash that can be utilised exclusively for explicit purposes. Restricted funds or reserves give consolation to benefactors that their contributions are utilised in a way that they have picked. They most frequently show up with regard to reserves held by specific charities, colleges, or insurance agencies.

9. Charge on Assets – Charge on assets is placed by the company on its own assets when the company incurs bad debts. Every year, the company must declare its total bad debts secured by the charge on its assets. This is the right of the lessor to be paid by the lessee’s assets when the debts are not paid in time.

10. Voting Power – The owners of the company or the equity shareholders who are deemed as the owners of the company have the right to vote. The voting powers can be used to resolve issues regarding business operations, change in ownership, acceptance of new partners, and acceptance of the latest technology or projects.

11. Accounts Receivables – Accounts Receivable (AR) is the payment or proceeds that the organisation will get from clients who have bought its services and products using a loan or credit. Generally, the credit period is short, which ranges from a few days to months, or at times, perhaps a year.

12. Bill Discounting – Discounting of a bill refers to the encashment of the bill before the date of its maturity. The bank deducts its charges from the bill. The bank shall make the payment of the bill after deducting some interest (called a discount in this case). This process of encashing the bill with the bank is called discounting the bill. The bank gets the amount from the drawee on the due date.

13. Factoring – Factoring is a financial service under which the ‘factor’ renders various services, which include: discounting of bills (with or without recourse) and collection of the client’s debts. Under this, the receivables on account of the sale of goods or services are sold to the factor at a certain discount. There are two methods of factoring – recourse and non-recourse. Under recourse factoring, the client is not protected against the risk of bad debts. On the other hand, the factor assumes the entire credit risk under non-recourse factoring. For providing information about the creditworthiness of prospective clients etc., factors hold large amounts of information about the trading histories of the firms.

14. GDRs – GDR stands for Global Depositary Receipts. It is a type of bank certificate that acts as shares in foreign companies. It is a mechanism by which a company can raise equity from the international market.

GDR is issued by a depository bank located overseas; in other words, GDR is issued by a depository bank that is located outside the domestic boundaries of the company to the residents of that country.

GDR is mostly traded in the European Market. Issuing GDR is one of the best ways to raise equity from overseas.

15. FCCBs – A type of convertible bond issued in a currency different from the issuer’s domestic currency is known as a Foreign Currency Convertible Bond (FCCB). A convertible bond is a mix between an equity and debt instrument. Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution.

From an Indian perspective, Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.

16. ADRs – ADR stands for American Depository Receipts, which are a kind of negotiable security instrument that is issued by a US bank representing a specific number of shares in a foreign company that trades in US financial markets. ADRs make it easy for US investors to purchase stock in foreign companies.

17. ICD – An Inter-Corporate Deposit (ICD) is an unsecured loan extended by one corporate to another. An Inter-Corporate Deposit (ICD) is an unsecured borrowing by corporates and Financial Institutions from other corporate entities registered under the Companies Act 1956. This lending would be on an uncollateralised basis, and hence a higher rate of interest would be demanded by the lender.

18. IDR – Indian Depository Receipt (IDR) is a monetary instrument designated in Indian Rupees as a depository receipt. The IDR is a particular Indian rendition of similar (GDRs) Global Depository Receipts.

It is made by a Domestic Depository (custodian of securities enlisted with the Securities and Exchange Board of India) against the fundamental value or the underlying equity of the issuing organisation to empower foreign organisations to raise liquid assets from the Indian Securities Markets. The foreign organisation IDRs will deposit shares in an Indian depository. The depository would give receipts to Indian financial backers against these shares. The advantage of the underlying shares, like profits, bonuses, and so forth, would build to the depository receipt holders in India.

We hope that the offered Business Studies Index Terms for Class 11 with respect to Chapter 8: Sources of Business Finance, will help you.

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