Itb unit-4

Short Term or Working Capital
 Short term or working capital is money
spent on business operations covering a period
of a year or less . Working capital is used to
purchase inventory and to pay daily operating
expenses such as wages and salaries ,insurance
premium ,rent and utilities.
 “Capital raised for a short-term period to cover
exceptional demand for funds over a short-
period. A bank loan ,rather than a debenture ,
is an example of short term capital”
 Example: Office Supplies , Various Expenses

Long term or Fixed Capital
 This is money used to buy fixed assets , which
are long lived and (with the exception of land )
manufactured items that will be used to
produce goods and services for several years.
 Fixed capital is the amount of capital tied up in
the capital assets of an organization.
 Example – Purchase of land , machinery ,
transport , construction of buildings.

Short Term Capital Long Term Capital

Short Term Financial Instruments
 Short Term Instrument -a negotiable
instrument that matures in three months or
less.
 Promissory note : The first and most
common. A promissory note is a short term
financial instrument ,given by a debtor(called
the promisor ) to a creditor (called the
promisee ) as a legal and binding promise to
pay a certain sum of money at a future date,
usually with interest at a fixed rate.

Draft : A draft is an instrument
completed by a creditor ordering a
debtor to pay a specific sum of money.
Commercial paper : An unsecured
promissory note of a large corporation
used to borrow large amounts for short
periods of time.
Check: A kind of draft used to make
payments in financial transactions.

Types of check:
Cashiers check : is written by a
commercial bank against its own money .
Generally considered the safest kind of
check, it may be purchased by giving the
bank the amount to be paid plus a modest
fee.
Certified check: is a depositor's own
check that the bank certifies to be good.

Institutions and methods of short
term financing
Trade credit : Materials , supplies, and merchandise
inventories frequently purchased on trade credit
.The debtor may pay for the items bought within a
given time period, usually 30,60 or 90 days.
Key term : Cash discount- 2/10 ,n/30
Borrowing from commercial bank: companies
that obtain working capital from commercial
banks usually establish a line of credit, which is a
maximum amount that a commercial bank agrees
to lend to a business borrower if it has the funds
available

Commercial finance company: A firm that
makes cash loans to business borrowers
securing the loans by such assets as trade
credit accounts , inventory, or equipment.
Factoring company : A firm that buys a
business’s open-book accounts and
customarily absorbs losses if the debtors do
not pay. Usually factors performs all billing
and other bookkeeping activities on the
accounts.

Sales finance company : A sales finance
company, is a firm that provides short term
capital to retailers ( and sometimes to
wholesalers) by purchasing the installment
sales contracts (promissory notes) that they
have accepted from customers.
Consumer finance company: A company
that lends money to final consumers on
their promissory notes. These loan may be
secured by the product the consumers
intend to buy or by some other valuable
items that they own.

Sources of long term capital
Retained earnings: are profits reinvested in a
company for improvements and expansion .
depending , on its expected growth rate and
long term capital requirements, a firm will
retain some ( some times all) of its yearly
profits for expansion.
Securities : A company can raise large sum of
money selling shares of stock or debenture.
Securities can be
1.Equity securities
2. Debt securities

1.Equity securities : The word equity in this
sense means ownership. Stock holders are
the legal owners of a company. The
purchasers gain the ownership of the
company.
2. Debt securities: Debt securities are
interest bearing promissory notes. Bond is
the most common form of securities

Common stock
Common stock , which all corporations organized
for profit must issue, is a security held by the
corporation’s owners.
key terms :
1.Common stock certificate: is a legal evidence of
corporate owner ship. It gives name, the number of
shares owned and various data on the corporation it
self.
2. Round lot : 100 shares of a stock or multiples thereof
3. Odd lot : Less than 100 shares of a stock
4. Dividend : A portion of a company profits paid to
stock holders as a return for the risk that they take
as owners.

5. Stock dividend :is a distribution of shares of
the company’s stock or the stock that it owns in
other firms
6.Pre-emptive right : is a shareholders right to
purchase shares of a company’s new stock
issues in proportion with the existing shares
that he or she owns.
7.Warrant : is a document that conveys the
preemptive right to existing stock holders.
8. Stock splits : A subdivision of shares already
issued, done to decrease a stock’s high market
price to an amount that more investors can
afford to pay.

Preferred stock and types
Preferred stock: is a class of stock that has a prior or senior
claim on assets to that of common stock
1.Participating preferred: This stock can pay an additional
dividend beyond its standard amount as specified by the
corporation
2. callable preferred: The issuing company may require the
holder to surrender these shares at a call price
3. Convertible preferred: This stock can be converted to
common stock.
4.Cumulative preferred: Preferred stock on which the company
must pay all dividends that are unpaid.
5. Non cumulative preferred : Preferred stock on which the
unpaid dividends do not carry forward to the next year.
6. Adjustable preferred: The dividend rates on this variation
change quarterly according to interest rates paid on U.S.
treasury securities

Financing with Bond
Key terms:
1.Debt Capital : Capital that a company obtains by selling
bonds
2. Bond Indenture : is a blanket agreement between the
corporations and its bondholders that states the bond
issue’s interest rate, maturity date, and other terms and
conditions.
Types of Bond-
1. Mortgage Bond : A bond secured by a claim against a
specific company asset, such as buildings or land.
2. Equipment Trust Bond : A bond issued to finance new
equipment, the title to which is held by a trustee for the
security of the bond holders.
3. Income Bond : A bond that pays interest only when the
company’s earnings permit.

4.Debenture Bond : An unsecured bond, backed
only by the firms general reputation.
5.Callable Bond : A bond that the issuing firm may
call in and pay off.
6.Convertible Bond : may be exchanged for the
issuing company’s common stock.
7.Serial Bond : One form of a bond issue that
matures in lots or increments, either annually or
semi annually, over several years.
8.Zero Coupon Bond : A non interest bearing
bond sold at a deep discount and redeemed for
face value at maturity.

Small Business and Franchising
Legal requirements for small
business: 531
1.Zoning ordinances
2. Local government approval
3. Registration of name
4.Internal revenue service formalities
5. Formalities of state revenue
department

Considering factors in starting small
Business
1. Experience
2. Capital
3. Location
4. Lease
5. Customer demographics
6. Inventory management
7. Competition
8. Condition of business
9. financial record

Sources of Financing
1. Personal saving
2. Credit from suppliers
3. Manufacturer financing of equipment
4. Commercial bank
5. The small business administration
6. Selling stock
7. Venture capital firms : is a company that buys
stock in new firms that make products or
services with strong profit potential.

Franchising
Franchising ?
A franchise is a license sold by one firm ( the
franchisor) to another (the franchisee) allowing it to
produce and sell a product or service under specific
terms and conditions-544

What does Franchising offer you ?
1.National reputation
2. National advertising and sales promotion program
3.Proved work layout refined for maximum
efficiency in minimum space
4.Advice about site selection
5.Assistance in negotiating leases and purchase
agreements for equipment and other items.
6.Blueprints and bill of materials for constructing
the building

7.Training in how to manage the business for maximum
profitability
8. An accounting system developed to meet the needs of
this business and the reporting requirements of the
parent company
Example :
Coca-Cola- Global Beverage
RC-Cola- Partex Beverage

What do you have to sacrifice ?
1.Investment of a minimum amount of capital
2. payment of a percentage of gross profits ( and possibly
a fixed fee) to the parent company at specified times
3.Payment of several additional items as required
4. Approval from parent company for choice of
location; installation of any furniture and
fixtures ; deviation from prescribed menu or
inventory; purchase of disposables or inventory
from anyone other than the parent company;
pricing changes; involvement in any other
business of a similar nature ; and even changes in
prescribed hours of operation

5. Full involvement in management and daily
operation
6.Personnel required to present a specified
appearance
7.No members of owners family working in
the franchise
8.Detailed accounting reports furnished to
the parent company
9. Management techniques and methods of
operation kept confidential

10.Minimum amount of insurance purchased
as dictated by the parent company
11.shelf-life standards dictated by the parent
company for perishable inventory
12. Minimum amount of money spent each
year for advertising and sales promotion
13.Periodic training as required by the parent
company at a specified location.

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