On what basis sources of funds can be categorised ?

Solution

Sources of funds can be categorized using different bases viz.

1. On the basis of the period,

2. Ownership basis,

3. Sources of Generation Basis.

1. On the Basis of Period : On the basis of period, the different sources of funds can be categorized into three parts.

a. Long-term finance : Long-term sources fulfil the financial requirements of an enterprise for a period exceeding 5 years and include sources such as shares and debentures.

b. Medium-term finance : The sources that fulfil the financial requirements for the period of more than one year but not exceeding 5 years are called medium-term sources.

c. Short-term finance : Short-term finance are those which are required for a period not exceeding one year.

2. Ownership Basis : On the basis of ownership, the sources can be classified into “owners funds” and “borrowed funds”. Owners funds means funds that are provided by the owners of an enterprise. Borrowed funds, refer to the funds raised through loans or borrowings.

3. Sources of Generation Basis : Sources of Generation Basis are as follows :

a. Internal Sources : Internal sources of funds are those that are generated from within the business. A business, for example, can generate funds internally by accelerating collection of receivables, disposing of surplus inventories and ploughing back its profit.

b. External Source : External sources of funds include those sources that lie outside an organization, such as supplies, lenders, and investors.

Some More Questions From Sources of Business Finance Chapter

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Sources Of Business Finance

On what basis sources of funds can be categorised ?

Some More Questions From Sources of Business Finance Chapter

Give meaning of borrowed capital.

Give meaning of long-term finance.

Give meaning of medium-term finance.

Give meaning of short-term finance.

Define shares.

Give the types of shares.

Define preference shares.

Give meaning of equity share.

Give the meaning of debenture.

Define “Ploughing back of profits”.

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