Feb 29, 2016

FINANCE & ACCOUNTS


Capital is conventionally described as short term, medium and long term. The distinctions are not rigid but short term capital may be regarded as liability repayable within one year, medium term as repayable between one and ten years in the future and everything else being long term capital (this covers both the proprietors ordinary risk capital or equity and long term borrowings or debt capital). In general, working capital requirements should be financed by short term capital and capital permanently invested in business should be long term.

Medium term capital is useful to give added flexibility and balance to the overall financial structure. One of the most important considerations is to preserve a proper balance between debt and equity in the company’s financial structure. The object of the company financial management should be to see that the company has adequate funds at the lowest cost consonant and so to seek to maximize its earning for ordinary shareholder.

NEED FOR CAPITAL

Capital is required to finance the conduct of business. When a manufacturing business is first established, factory and office premises will be needed and plant machinery and transport vehicles. They can either be bought out right or hired: in the first case, the expenditure represents capital invested permanently in the business. In addition, funds will be required to finance the production from the initial purchase of raw materials until the sale of the finished products, to pay for wages and to meet overheads: these funds are known as working capital. As the business expands, fresh injections of both permanent and working capital will be required. When the original fixed assets need replacing, more expenditure will be needed. Funds will also be required for acquisition.

RAISING OF FUNDS

Few entrepreneurs can afford to start up using their own savings. The capital of owners is equity. Other forms of capitals are long term debt which can vary in amount, purpose and legal entitlement.

Long term debt must be repaid at the end of the stated terms unless both sides are willing to re negotiate terms for another period.

Lenders must be paid interest each year. When the profits of the business fall, this interest commitment becomes a burden.













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