Very Short Question and Answers - Funds and Classification

Business finance refers to the requirements of funds by a business to carry out its various activities.

Because no business can operate or survive without sufficient funds to run its operations.

Fixed capital requirement refers to the funds needed to purchase fixed assets like land, building, plant and machinery, and furniture.

Examples include land, building, plant and machinery, and furniture and fixtures.

Funds invested in fixed assets generally remain in the business for a long period of time.

A trading concern generally requires less fixed capital than a manufacturing concern.

Working capital is the funds needed by a business for its day-to-day operations, mainly used for holding current assets.

Fixed capital example: Buying machinery; Working capital example: Purchasing raw materials.

Based on the period, sources of funds can be classified as long-term, medium-term, and short-term sources.

Long-term sources are those needed for a period exceeding 5 years.

Examples of long-term sources include shares, debentures, long-term borrowings, and loans from financial institutions.

Medium-term funds are required for a period of more than one year but less than five years.

Two sources of medium-term funds are borrowings from commercial banks and public deposits.

Short-term funds are required for a period not exceeding one year.

Examples of short-term fund sources include trade credit and commercial papers.

On the basis of ownership, sources of funds are classified as owner's funds and borrowed funds.

Owner's funds are funds provided by the owners of an enterprise such as sole traders, partners, or shareholders.

Two important sources of owner's funds are issue of equity shares and retained earnings.

Borrowed funds are the funds raised through loans or borrowings from various sources.

Borrowed funds can be raised from commercial banks, financial institutions, and by issuing debentures.