Sources of Business Finance — OCM STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceOCMSources of Business Finance5 Marks
Question
Explain the factors deciding the need of capital.
✓
Answer
Introduction :
Business activities are carried on in various forms such as sole Proprietorship, partnership, Hindu Undivided Family Firm, Co-operative Society, or any Company Form.
No activity is possible without finance. Founders realize their dreams of business through money. Money is the centre of any business activity.
Due to industrialization many inventions have occurred in the field of science and technology. As a result, automation and mechanization increased in industries.
Manufacturing was started with the expectation of large scale demand.
And the need of huge capital raised. Various sources of business finance were sought out to satisfy financial needs.
Concept of Business Capitals :
From the view point of accounting; cash stock, and assets invested by owners in business is Business capital. ›. From the view point of commerce; cash, stock, assets and capital borrowed from various sources and invested in business by owners is Business capital.
In short, business capital means fund raised to satisfy financial need of business is called business capital.
Needs of Business Finance :
Capital is badly needed to meet the following needs of business.
For establishment of business :
Capital to required before commencing business.
It is needed for primary intense inspection, to obtain certificate of incorporation, to prepare required documents, to pay registration fees, and to meet other primary expenses.
For Purchase of Fixed Assets :
Assets such as land, building, machinery, vehicles required long term capital.
For Current Assets :
To purchase raw-material, to pay wages - labour, to obtain ancillary services, to keep stock, to pay day to day expenses, short term capital is required.
This type of capital is known as current capital or working capital.
For Modernization and Expansion of Business :
Due to new research and development modern machinery should be installed and for expansion of business long term capital is required.
For Accidental Requirement :
Capital is required meet incidental factors affecting internal and external needs of business.
To face crisis in business, capital is needed. Internal factors such as fire, accident, strike of employees, are to be faced.
Trade cycle (bulls -bears) unexpected change in government policy, natural calamities etc. are called external factors.
Conclusion :
Source of capital is determined on the basis of its time period.
It is important to determine how long the requirement will last.
Long term capital is obtained through issuing share capital, debenture etc.
Short term working capital is obtained from commercial bank and financial institutions.
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