Small Scale Industries 5 Capital Structure Finance is the Life Blood of any business.

. Its management is an art and calls for special attention. In most of the organizations, finance is handled by Chartered ccountants. !he company"s gro#th depends upon the proper maintenance of financial accounts. !he financial function of management is to $nsure a fair return on in%estment &enerate and build up surplus and reser%es for gro#th and e'pansion (lan, direct and control the utilization of finances so as to ensure the ma'imum efficiency of operations of operations and build a proper relationship #ith suppliers, financiers, #or)ers and members. Co*ordinate the operations of the %arious departments through appropriate measure to ensure discipline in the use of financial resources.

!he term capital refers to the total in%estment of money, tangible assets li)e buildings, etc., and intangible assets li)e good#ill. It is the total #ealth of a unit or a company. !he net capital refers to the e'cess of total assets o%er total liabilities. Capitalisation: Capitalisation is the sum total of all long term securities issued by a company and the surpluses not meant for distribution includes only term loans and retained profits. If a company raises more capital than is re+uired by the figure of capitalization or its earning po#er, it is said to be o%er capitalized, but if its capital is lo#er than its earning po#er, it is said to be under capitalized. $ffects of ,%er Capitalisation- s a result of o%er capitalization .. !here is considerable reduction in the rate of di%idend on e+uity shares /. !he mar)et %alue of shares declines and in%estors lose confidence in the company 0. !he company results to #indo# dressing 1. !here is lo# of good#ill. 5. It is indication of reduced efficiency 2. 3esults in a mis*appropriation of the society"s resources 4. Leads to a cut in the #ages of #or)ers #ith a %ie# to raising profits 5. 6a)es it difficult for a company to #ithstand competition 7. Shareholders recei%e lo# di%idends. .8. 9epreciated shares are sub:ect to gambling on stoc) e'change ... Scope for remedial measures or reorganization. Under Capitalisation company is under capitalized #hen its capital is lo#er than #arranted by its earning capacity. !he management should capitalize its earnings by issuing fully paid up bonus shares. Fle'ibility in financial planning is therefore +uite essential if the capital structure is to be ad:usted to the %arying needs of the company. Capital Structure !he capital structure of a company in%ol%es a decision regarding the ratio of o#nership capital as against credit capital, bet#een short*term and long*term capital and the ratio among the different sources of finance for capital. !his includes loans, bonds, share issues and reser%es.

Capital Structure of a Company Draw out a diagram Page No. 294 from the te t !oo". !he maintenance of proper ratios bet#een the different types of securities is )no#n as capital gearing and the follo#ing factors generally controls the capital gearing.. /. 0. 1. 5. 2. 4. !rading in e+uity 3etaining control of a company ;ature of enterprises $lasticity of the financial plan Legal re+uirements 6ar)et sentiment 3e+uirements of in%estors.

!he financial pattern of large scale and medium scale industries is +uite different from that of small scale industries. small scale industrial unit re+uires funds before it can come into e'istence and it needs funds for e'pansion, modernization and #or)ing capital. It re+uires long term finance to ac+uire fi'ed assets li)e land and building, plant and machinery, etc., and short term #or)ing capital for the purchase of ra# materials and stores and for the payment of #ages. !he long term finance is gi%en by the &o%ernment and de%elopment ban)s and short term finance is pro%ided by commercial ban)s. Capital Structure of Small Scale Sector !he capital structure of small scale industry is +uite simple. large number of industries commence production #ithout any capital. $%en #hen there is re+uirement of capital, the same are contributed by the entrepreneur or by money borro#ed from relati%es and friends and sho#n as capital. ,nly in case of bigger units among #ith small scale sector capital is raised from the public. #i ed and wor"ing capital needs of small scale industrial units!he credit facilities for small case industries may be re+uired for 6eeting the e'penses incurred on installation of plant and machinery, ac+uisition of land building, maintenance of machinery against depreciation, reno%ation, modernization and e'pansion (urchase and stoc)ing of ra# materials, in%entories of goods, and goods in the process of manufacture. Fi'ed capital needs may be met by medium and long term loans #hile #or)ing capital re+uirement may be met by short term ad%ances. $imitations of %stimating the &otal 'n(estment )e*uirements+ !here are many limitations arise in the estimation of fi'ed and #or)ing capital re+uirements of small scale units. It is difficult to differentiate bet#een small scale industries, %illage and cottage industries and small borro#ers, etc. ll small units are not registered #ith the State 9irectors of Industries. 6any small units do not maintain proper boo)s of accounts. s a result it is difficult to estimate the credit re+uirement for fi'ed and #or)ing capital for small scale industries. Conclusion+ Capital is the )ey input in small scale industries. Capital structure of small scale industries %ary #ith the size of business, character of business, gro#th, ape <imitating others=, size of industry, corporate ta'ation, etc. Small Scale industries need ade+uate capital for the operation and gro#th.