Basic Concept And Classification Of Sources Of Fund
When you are going to buy a gift for someone you will have to look after your budget and sources of fund need to buy the gift. Likewise, in the business also you have to manage funds to sustain the business. Qprofit system review explains how to deposit funds into the trading account. Here we will learn about the sources of funds.
- A) Sources of funds
Without money, you cannot run the business and the money need to run the business is known as the business funds. There will be the continuous requirement of money throughout the business life continuously. The sources of funds are classified based on the time period and ownership and control, and source of generation.
1) Based on the time period
There are 3 different types of sources of fund classified based on the time period. They are
- a) Long-term sources
Financial requirement of a business is fulfilled for a period of five years by this long-term sources. The various sources included here in this type are shares, debentures, borrowings and getting loans from the financial institution. For financing assets such as plant, machinery, equipment is required.
- b) Medium-term sources
Funds required for the period of more than one year but not exceeding five years is called the medium source of fund. The sources are from a commercial bank, finance, public deposits.
- c) Short term sources
Funds required for a period of not exceeding one year is called the short-term source of fund. Examples for the short term funds are the credit and loans from the commercial banks. This fund is very common for the wholesalers and the manufacturers; they require assets for the short term fund
- B) Ownership basis sources
The sources are classified into owners fund and borrowed funds. The fund of a person who is found to be a sole entrepreneur of a business is called as owners fund. Profits from the business are reinvested for a period of a long time and no need to refund. And the funds obtained from the loans or from borrowing are referred to as the borrowed funds. Funds are raised from the commercial banks, public deposits, and debentures. These funds have to be repaid before the expiry date along with the interest.
- C) Generation basis sources
The funds are classified based on the sources of generation within the organization or from the external sources. Internal sources are generated within the business itself by speeding the collection, increasing profit and disposable of inventories. Whereas, external sources are from outside the business organization from the suppliers, investors and the lenders.