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NAME KOUASSI DIDO ANDERSON ZOUONI JACQUES-FABRICE COULIBAKY YOUNOUSSOU

THE SOURCES OF FINANCE

SHORT TERM SOURCES There are a number of sources of short-term finance which are listed below: 1. Trade Credit Trade credit refers to credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. Usually business enterprises buy supplies on a 30 to 90 days credit. This means that the goods are delivered but payments are not made until the expiry of period of credit. This type of credit does not make the funds available in cash but it facilitates purchases without making immediate payment. This is quite a popular source of finance. 2. Bank Credit Commercial banks grant short-term finance to business firms which are known as bank credit. When bank credit is granted, the borrower gets a right to draw the amount of credit at one time or in instalments as and when needed. Bank credit may be granted by way of loans, cash credit, overdraft and discounted bills. (i) Loans When a certain amount is advanced by a bank repayable after a specified period, it is known as bank loan. Such advance is credited to a separate loan account and the borrower has to pay interest on the whole amount of loan irrespective of the amount of loan actually drawn. Usually loans are granted against security of assets. (ii) Cash Credit It is an arrangement whereby banks allow the borrower to withdraw money up to a specified limit. This limit is known as cash credit limit. Initially this limit is granted for one year . This limit can be extended after review for another year. However, if the borrower still desires to continue the limit, it must be renewed after three years. Rate of interest varies depending upon the amount of limit. Banks ask for collateral security for the grant of cash credit. In this arrangement, the borrower can draw , repay and again draw the amount within the sanctioned limit. Interest is charged only on the amount actually withdrawn and not on the amount of entire limit.

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(iii) Overdraft When a bank allows its depositors or account holders to withdraw money in excess of the balance in his account up to a specified limit, it is known as overdraft facility . This limit is granted purely on the basis of creditworthiness of the borrower. Banks generally give the limit upto Rs.20,000. In this system, the borrower has to show a positive balance in his account on the last friday of every month. Interest is charged only on the overdrawn money . Rate of interest in case of overdraft is less than the rate charged under cash credit. (iv) Discounting of Bill Banks also advance money by discounting bills of exchange, promissory notes and hundies. When these documents are presented before the bank for discounting, banks credit the amount to cutomers account after deducting discount. The amount of discount is equal to the amount of interest for the period of bill. This part has been discussed in detail later on in this chapter. 3. Customers Advances Sometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is quite large or things ordered are very costly. Customers advance represents a part of the payment towards price on the product (s) which will be delivered at a later date. Customers generally agree to make advances when such goods are not easily available in the market or there is an urgent need of goods. A firm can meet its short-term requirements with the help of customers advances. 4. Instalment credit Instalment credit is now-a-days a popular source of finance for consumer goods like television, refrigerators as well as for industrial goods. You might be aware of this system. Only a small amount of money is paid at the time of delivery of such articles. The balance is paid in a number of installments. The supplier charges interest for extending credit. The amount of interest is included while deciding on the amount of instalment. Another comparable system is the hire purchase system under which the purchaser becomes owner of the goods after the payment of last instalment. Sometimes commercial banks also grant instalment credit if they have suitable arrangements with the suppliers. 5. Loans from Co-operative Banks Co-operative banks are a good source to procure short-term finance. Such banks have been established at local, district and state levels. District Cooperative Banks are the federation of primary credit societies. The State Cooperative Bank finances and controls the District Cooperative Banks in the state. They are also governed by Reserve Bank of India regulations. Some of these banks like the V aish Co-operative Bank was initially established as a co-operative society and later converted into a bank. These banks grant loans for personal as well as business purposes. Membership is the primary condition for securing loan. The functions of these banks are largely comparable to the functions of commercial banks.

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LONG TERM SOURCES The main sources of long term finance are as follows: 1. Shares These are issued to the general public. These may be of two types:(i) Equity and (ii) Preference. The holders of shares are the owners of the business. 2. Debentures These are also issued to the general public. The holders of debentures are the creditors of the company . 3. Public Deposits General public also like to deposit their savings with a popular and well established company which can pay interest periodically and pay-back the deposit when due. 4. Retained earnings The company may not distribute the whole of its profits among its shareholders. It may retain a part of the profits and utilize it as capital. 5. Term loans from banks Many industrial development banks, cooperative banks and commercial banks grant medium term loans for a period of three to five years. 6. Loan from financial institutions There are many specialised financial institutions established by the Central and State governments which give long term loans at reasonable rate of interest. Some of these institutions are: Industrial Finance Corporation of India ( IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India ( UTI ), State Finance Corporations etc. These sources of long term finance will be discussed in the next lesson.

THE INNOVATIVE SURCES OF FINANCE

Remittances Remittances are emerging as an important source of external development finance. Conservative estimates indicate that remittance flows have surpassed the astounding figure of $ 100 billion a year and have become for

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many developing countries a much more important source of finance than official aid. However, it should be noted that the bulk of international remittances do not accrue to the poorest nations as they are benefiting mainly middle-income countries. While it is important to emphasize that remittances hardly qualify as innovative sources of finance for development, initiatives to facilitate the transfer of remittances (reduction of transaction costs) and the diffusion of these flows to-wards a more productive and growth enhancing use have been a major undertaking by the inter-national community in recent years. In response to the increasing debate about remittances, some development experts have argued that as with the euphoria with private capital flows in the mid-1990s, the attractiveness of remittances is in part a reaction to previous failed development mantras. The recent increase in research on the development impact of remittances and the promotion by donor countries to facilitate such financial flows may also be explained by the fact that unlike foreign aid, remittance flows do not put any burden on taxpayers in rich countries. While it would be inappropriate to dismiss the development impact of remittances, the benefits of these financial flows do not offset the adverse effects of the brain drain in developing countries. Furthermore, it should be pointed out that the industrial countries have different political options to contribute to an increase in the volume of remittances worldwide by improving working conditions and the legal status of immigrants. On the recipient side the evidence regarding the direct impact of remittances on economic development and growth is limited. While the bulk of remittances is spent on consumption, wider multiplier effects could only be achieved if local financial institutions such as savings banks would accessible to the poor. A broader economic transformation of remittances may also require governments to provide additional financial instruments, such as loans backed on remittances, in order to overcome capital and liquidity constraints that are critical for small enterprise development. International tax cooperation to fight tax evasion Tax evasion and loopholes in the international tax system have become defining features of global financial markets in recent years 20.While most of these undeclared funds originate from developed countries, a significant portion also comes from developing countries, and deprives them of funds needed for development. Accord-ing to the Landau report the loss in tax revenues generated by evasion in developing countries may be equivalent to the sums needed to achieve the Millennium Development Goals. It seems therefore pointless to think about poverty reduction, if at the same time little is being done to help to rebuild developing countries taxation capabilities, both of their own residents and on foreign-owned capital. The share of activities pertaining to tax evasion in financial markets by trans-national corporations (TNCs), which are prepared to make use of loopholes in the inter-national economy, moreover, imparts an unfair competitive advantage over domestic competitors and small and medium size enterprises that do not have the global reach of the TNCs. Contrary to tax competition, governments agree, in principle, on the need to fight tax evasion. What would be needed in this context is a universal withholding tax on non-residents portfolio in-come. At a high enough rate the withholding tax would remove the evasion motive for capital flight from developing countries. In the area of tax competition it would be necessary to end all tax preferences to producers on account of foreign ownership of headquarters or production. But plugging these loopholes that are being exploited by TNCs would be a difficult task to achieve. Due to the resistance by developed countries, a tax oriented body such as the new UN committee of tax experts might be able to achieve consensus between the different parties.

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BALANCE SHEET
NESTLE
Dec ' 11 Sources of funds Owner's fund Equity share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : accumulated depreciation Net block Capital work-inprogress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Total 0.84 970.03 2,244.82 855.41 581.27 474.17 0.82 421.3 2.87 96.42 1,177.54 96.42 759 96.42 484.85 96.42 376.93 96.42 322.01 Dec ' 10 Dec ' 09 Dec ' 08 Dec ' 07

2,552.21

1,854.70

1,640.79

1,404.85

1,179.77

976.46 1,575.75 1,418.64 134.37

841.96 1,012.74 348.91 150.68

744.59 896.2 79.63 203.26

651.85 752.99 109.17 34.9

577.96 601.81 73.7 94.4

1,333.03

1,094.70

903.36

836.86

678.69

2,216.96 -883.93 2,244.82

1,751.61 -656.91 855.41

1,501.18 -597.82 581.27

1,259.75 -422.89 474.17

1,027.31 -348.61 421.3

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HINDUSTAN UNILEVER Ltd.

Mar ' 11

Mar ' 10

Mar ' 09

Dec ' 07

Dec ' 06

Sources of funds
Owner's fund Equity share capital Reserves & surplus 215.95 2,417.30 218.17 2,364.68 217.99 1,842.85 217.75 1,220.82 220.68 2,502.14

Loan funds
Secured loans Unsecured loans Total 2,633.25 2,582.85 144.65 277.3 2,482.79 25.52 63.01 1,527.10 37.13 35.47 2,795.42

Uses of funds
Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-inprogress Investments 3,759.62 0.67 1,590.46 2,168.49 299.08 1,260.68 3,581.96 0.67 1,419.85 2,161.44 273.96 1,264.08 2,881.73 0.67 1,274.95 1,606.11 472.07 332.62 2,669.08 0.67 1,146.57 1,521.84 185.64 1,440.81 2,462.69 0.67 1,061.94 1,400.08 110.26 2,522.22

Net current assets

Current assets, loans & advances Less : current liabilities & provisions Total net current assets Total 6,494.19 5,818.89 6,040.04 3,681.12 3,555.08

7,589.19 -1,095.00 2,633.25

6,935.52 -1,116.63 2,582.85

5,968.06 71.98 2,482.79

5,302.30 -1,621.18 1,527.10

4,792.23 -1,237.15 2,795.42

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INDIAN RAILWAY FINANCE CORPORATION LTD.

Mar ' 10 Sources of funds Owner's fund Equity share capital Share application money Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : accumulated depreciation Net block Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

1,091.00 2,314.48

500

500

232

232

300 1,980.70 1,925.76

268 1,621.25 1,863.76

27,944.70 5,663.88 37,014.05

22,600.25 4,788.46 30,169.41

19,012.60 5,085.97 26,524.33

16,341.94 5,452.22 23,915.41

14,448.79 5,467.29 22,011.84

16.99 3.3 13.69 2

17.08 3.09 13.99 2

17.01 2.81 14.2 2

16.98 2.41 14.57 2

16.9 2 14.9 21,900.52

40,647.22

33,361.24

29,176.39

26,209.40

1,642.42

3,650.04 36,997.18 1.18 37,014.05

3,241.91 30,119.33 34.09 30,169.41

2,668.45 26,507.93

2,310.56 23,898.84

1,546.00 96.42

0.2 26,524.33 23,915.41 22,011.84

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INDIAN OIL COORPORATION

Mar ' 11 Sources of funds Owner's fund Equity share capital Share application money Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : accumulated depreciation Net block Capital work-inprogress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total 20,379.65 20,379.65 1,08,066.19 52,904.37 2,427.95 -

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

2,427.95

1,192.37 21.6 -

1,192.37

1,168.01 24.36

48,124.88

42,789.29

39,893.88

33,664.92

18,292.45 26,273.80 95,119.08

17,565.13 27,406.93 88,975.32

6,415.78 29,107.39 76,609.42

5,671.42 21,411.27 61,939.98

92,696.69 34,509.29 58,187.40 12,620.44 19,544.76

71,780.60 30,199.53 41,581.07 21,268.63 22,370.25

62,104.64 27,326.19 34,778.45 18,186.05 32,232.13

56,731.50 23,959.68 32,771.82 9,170.22 21,535.78

54,770.29 21,400.07 33,370.22 4,394.30 19,990.86

84,903.08

60,971.48

45,234.47

53,506.07

43,966.26

67,204.64 17,698.44 15.15 1,08,066.19

51,090.52 9,880.96 18.17 95,119.08

41,493.74 3,740.73 37.96 88,975.32

40,499.06 13,007.01 124.59 76,609.42

39,938.93 4,027.33 157.27 61,939.98

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ANALYSIS OF THE DIFFERENT SOURCES OF FINANCE

NESTLE INDIA LTD. According to NESTLE CORPORATION , the long term sources of finance come from both the owners fund and long term debts (year 2011). Owner funds ( Equity share capital & reserve and surpluses) = 96.42 + 1,177.54 = 1,273.96(crore) Loan funds (Secured loans & unsecured loans) = 0.84 + 970.03= 970.87(crore)

From a global observation, through the companys balance sheet we can say that most of the long term sources of finance are from the owners. DEBT EQUITY RATIO (DER) DER = DEBT/EQUITY = 970.87/1,273.96 = O,76 The long term financial position of the company is good.

INDIAN RAILWAY FINANCE CORPORATION LTD.

According to INDIAN RAILWAY FINANCE CORPORATION , we took into consideration the year 2010. the long term sources of finance come from both the owners fund and long term debts . Owner funds ( Equity share capital & reserve and surpluses) = 1091 + 2314.48 = 3405.48(crore) Loan funds (Secured loans & unsecured loans) = 27,944.70+ 5,663.88= 33 608.58 (crore)

From a global observation, through the companys balance sheet, contrarily to NESTLE CORPORATION we can say that most of the long term sources of finance are from the long term debt which represent around ten times the amount invested by the owner in the company. DEBT EQUITY RATIO (DER) DER = DEBT/EQUITY = 33 608.58 /3405.48= 9.87 The long term financial position is not good.

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INDIAN OIL CORPORATION LTD.

According to INDIAN OIL CORPORATION , we took into consideration the year 2011. For this particular year, the long term sources of finance come from both the owners fund and long term debts . Owner funds ( Equity share capital & reserve and surpluses) = 2,427.95 +52,904.37 = 55332.32(crore) Loan funds (Secured loans & unsecured loans) = 20,379.65+ 32,354.22= 52733.87 (crore)

From a global observation, through the companys balance sheet we can say that, in spite of the fact that the owners funds are greater than the loan funds, most of the long term sources of finance of INDIAN OIL CORPORATION are from both the owners and the loans. DEBT EQUITY RATIO (DER) DER = DEBT/EQUITY = 52733.87 /55332.32= 0.95 The long term financial position of the company is good.

HINDUSTAN UNILEVER Ltd. According to HINDUSTAN UNILEVER, the long term sources of finance come exclusively from the owners fund (year 2011), and there is no long term loans. Owner funds ( Equity share capital & reserve and surpluses) = 215.95+ 2,417.30=2,633.25 (crore) Loan funds (Secured loans & unsecured loans) = 0 (crore)

DEBT EQUITY RATIO (DER) DER = DEBT/EQUITY = 0 The long term financial position of the company is Excellent.

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Referencing: Sources of Finance (Finance Sourcing) KeithTimimi (2010).Retrieved from http://www.economywatch.com/finance/sources-of-finance.html Innovative Sources of Finance Nicole Newman. Retrieved from http://www.ehow.com/list_6795964_innovative-sources-finance.html Nestle India Ltd. - Research Center rediffmoneywiz. Retrieved from http://money.rediff.com/companies/nestle-india-ltd/11120007/balance-sheet Indian Oil Corporation Ltd. - Research Center rediffmoneywiz. Retrieved from http://money.rediff.com/companies/indian-oil-corporation-ltd/12140022/balance-sheet Hindustan Unilever Ltd. - Research Center rediffmoneywiz. Retrieved from http://money.rediff.com/companies/hindustan-unilever-ltd/12520002/balance-sheet

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