A-AS Level (CIE) Business Studies Paper-1: Specimen Questions with Answers 30 - 30 of 50

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Question 30

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Essay▾

What are the different sources of finance in a business?

Explanation

Business Firms Need Finance Mainly for Two Purposes

  • To fund the long-term decisions decision
  • To meet the Working Capital requirements.

The long-term decisions of a firm involve setting up of the firm, expansion, diversification modernization and other similar capital expenditure decisions. All these involve huge Investment, the benefits of which be usually seen only in the long term. In addition to this, they are also irreversible in nature working Capital is required to support the smooth functioning of the normal company Finance needs of a Business are:

  • Long term financial needs: Required for a period exceeding business operation of a 5 - 10 years, All fixed investments in plant. machinery. And, buildings are considered as long-term financial needs.
  • Medium term financial needs: It is required for 1 to 5 years. Identification of medium-term financial needs is arbitrary, Sometimes, long term requirements for which long term funds cannot be arranged immediately may be financed from medium-term sources, thus generating medium-term financial needs.
  • Short term financial needs: It is related to investment in current assets such as stock, debtors, cash upon a few factors and may differ from industry to industry. They are required for a period of one year.

Financial Sources of a Business Can be Classified as Follows

  • Long term sources e. g. shares, debentures, long term loan, etc.
  • Medium term sources, e. g. debentures, public deposits, bank loan/overdraft.
  • Short term sources e. g. trade credit, advance from commercial banks, advances from customers.

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