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Answer: Retained earnings are the part of a company’s net profit that is kept in the business rather than distributed to shareholders as dividends. It is an internal source of finance used for expansion, buying equipment, or meeting emergencies. This source is suitable when the business is profitable and wants to avoid borrowing costs and interest payments. It is also helpful for maintaining financial independence and avoiding debt obligations. However, retained earnings depend on the size of profits, so they may be insufficient for very large projects. For example, if a firm earns ₹10 lakhs and retains ₹3 lakhs, it can use this money to upgrade machinery or invest in R&D. Retained earnings are most suitable for stable, growing companies that want to fund long-term needs without external pressure or loss of control.
Answer: Trade credit is a short-term facility where a seller allows the buyer to pay later, usually in 30, 60, or 90 days. For buyers, it helps maintain stock levels and continue operations even when cash is tight. It supports working capital by delaying cash outflow, allowing time to sell goods before payment is due. For sellers, it helps build relationships, expand the customer base, and increase sales volume. Sellers may offer cash discounts for early payment or set credit limits to manage risk. Common documentation includes invoices, bills, and delivery notes. While it helps both parties, the risks include bad debts for sellers and dependency on credit for buyers. Used wisely, trade credit becomes a trust-based tool that keeps the supply chain moving smoothly.
Answer: Lease financing is an arrangement where the lessor (owner) allows the lessee (user) to use an asset such as machinery, vehicles, or computers in return for periodic lease rentals. The ownership remains with the lessor, while the lessee gets the right to use the asset. Key features include no large upfront payment, fixed periodic rentals, and easy access to expensive assets. It is helpful for businesses that need assets but want to preserve cash or avoid loans. Advantages for the lessee include better cash flow management, easier budgeting, faster access to technology, and lower maintenance responsibility if included in the lease. For example, a school may lease computers or a construction firm may lease heavy machinery for a project. Leasing is ideal when assets are costly, upgrade frequently, or are needed for a limited time.
Answer: Public deposits are funds that companies collect directly from the public for a fixed period at a specified interest rate. Individuals or firms deposit money, and the company promises to repay with interest after the agreed time. Benefits include lower cost than some bank loans, no collateral, flexible amounts, and direct relationship with investors. Companies can use public deposits to meet short to medium-term needs such as working capital. However, limitations include the need to build trust, maintain reputation, and comply with legal guidelines. If investor confidence falls, raising deposits becomes difficult. Also, deposits must be repaid on time, adding pressure on cash flows. For example, a manufacturing firm might invite deposits at 8% interest for two years to finance its operations. Public deposits work best for well-known, trustworthy companies.
Answer: Commercial Paper (CP) is an unsecured, short-term money market instrument issued by companies in the form of a promissory note. It is used to meet working capital or short-term cash needs. Only companies with strong credit ratings usually issue CP because investors rely on the issuer’s reputation instead of collateral. Features include short maturity (often a few weeks to months), market-based interest cost, and quick access to funds. CP is attractive for reputed companies because it can be cheaper and faster than bank loans. Typical use cases include paying suppliers, managing seasonal cash gaps, or financing inventory. However, because it is unsecured, it carries higher risk for investors compared to secured options. CP suits large, credible firms that need speedy, short-duration financing and have consistent cash inflows to repay on time.
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Answer: Leasing is more suitable than buying with retained earnings for a short, 12-month project. First, lease financing avoids a large upfront payment, preserving cash for wages, fuel, and site expenses. Second, leasing aligns cost with usage: rentals stop when the project ends, avoiding the burden of owning idle assets later. Third, heavy machinery faces wear and obsolescence; leasing shifts part of the maintenance and resale risk to the lessor (depending on terms). Fourth, retained earnings can be saved for permanent needs like capability building, training, or future bids. Buying makes sense only if machinery will be used continuously across projects and the firm wants ownership benefits. For a one-year need with uncertain future use, lease financing offers flexibility, liquidity, and lower risk.
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