21. Sources Of Long Term Finance From Financial Management Subject
Summary
TLDRThe video provides an in-depth overview of long-term finance, essential for students in finance-related courses. It covers different sources of finance: long-term, medium-term, and short-term, focusing primarily on long-term finance. Key sources discussed include the issuance of shares (equity and preference shares), retained earnings, debentures, and long-term loans. The instructor explains the characteristics, risks, and benefits of each source, emphasizing the importance of understanding these concepts for practical application in business. The session aims to equip students with knowledge of how companies accumulate and utilize funds for sustainable growth.
Takeaways
- 📊 The topic of the class is long-term finance and how companies accumulate and utilize funds for growth.
- 🏢 Different companies require various types of financing based on their size and needs: small, medium, or large organizations may need working capital or long-term finance.
- 💰 Sources of finance are divided into three types: long-term, medium-term (1-5 years), and short-term (below 1 year).
- 📈 Long-term sources of finance are needed for periods longer than 5 years and are typically used for large investments like fixed assets.
- 📑 The main long-term financing sources include equity shares, preference shares, retained earnings, debentures, and long-term loans.
- 📉 Equity shareholders bear both profits and losses of the company, while preference shareholders only share in profits and get priority in receiving dividends.
- 🔒 Preference shareholders are prioritized over equity shareholders for dividends but do not bear company losses.
- 📉 Debentures are another key source of long-term finance, functioning similarly to loans, where the holder receives interest regardless of the company's financial status.
- 💼 Retained earnings are the profits set aside by a company for future use, acting as a financial reserve for uncertainties.
- 🏛️ Long-term loans are taken from financial institutions or banks, mainly for purchasing fixed assets or large organizational investments.
Q & A
What are the three main types of finance sources?
-The three main types of finance sources are long-term sources, medium-term sources, and short-term sources.
What defines long-term sources of finance?
-Long-term sources of finance are those that extend for more than five years and are typically used to finance fixed assets or long-term investments.
What are some examples of medium-term sources of finance?
-Medium-term sources of finance include public deposits, loans from commercial banks, and leasing finance, which are typically used for a period of one to five years.
How are short-term sources of finance defined?
-Short-term sources of finance are for periods of less than one year and include options like bank credit, trade credit, installment credit, advances, and commercial papers.
What are the two main types of shares a company can issue?
-A company can issue two main types of shares: equity shares and preference shares.
What are the key characteristics of equity shares?
-Equity shares represent ownership in a company. Shareholders are eligible to share in the profits and losses of the company, and their dividends fluctuate based on company performance.
What are preference shares, and how do they differ from equity shares?
-Preference shares provide shareholders with a fixed dividend and priority over equity shareholders when profits are distributed. However, preference shareholders do not share in company losses.
What are retained earnings, and how are they used?
-Retained earnings refer to profits kept by the company for future uncertainties or investments. These funds provide financial stability and are used to support long-term financial needs.
How do debentures function as a source of long-term finance?
-Debentures are a type of long-term loan where the company borrows funds from investors. Debenture holders receive a fixed interest, and they have a priority claim on company assets in case of liquidation.
What is the purpose of long-term loans in corporate finance?
-Long-term loans are taken by companies to finance the purchase of fixed assets such as machinery, buildings, and equipment, or for renovation and expansion projects.
Outlines
📘 Introduction to Long-Term Finance and Its Importance
In this paragraph, the speaker introduces the topic of long-term finance, emphasizing its importance for finance students across various academic disciplines such as B.Com, BBA, MBA, and professional courses like CA, CS, and CMA. The speaker explains how understanding long-term finance and its sources is crucial for companies to accumulate and utilize funds effectively. The difference between working capital and long-term finance is briefly touched upon, highlighting how different organizations require different financial strategies based on their size and needs.
📊 Three Types of Finance Sources: Long-Term, Medium-Term, and Short-Term
This section classifies financial sources into three categories: long-term, medium-term, and short-term. Long-term sources refer to funds that last over five years, medium-term covers 1-5 years, and short-term is below one year. The paragraph explains various sources for each type, such as public deposits and loans for medium-term and bank credit for short-term. However, the speaker clarifies that the focus of the class is on long-term finance and proceeds to set the stage for further discussion on the topic.
💡 Introduction to Sources of Long-Term Finance
The speaker introduces the core topic of long-term finance sources, explaining that this form of finance spans over five years and is crucial for organizations looking to invest in fixed assets and expand. Shares, a significant source of long-term finance, are discussed briefly, with the two primary types of shares—equity shares and preference shares—introduced. The speaker touches on the differences between these two types and how they relate to a company's profits, losses, and ownership structure.
📈 Detailed Explanation of Equity Shares
This paragraph dives deeper into equity shares, defining them as ordinary shares that represent ownership in a company. Equity shareholders share both profits and losses, with dividends fluctuating based on the company’s performance. The speaker uses an example of a shareholder holding 10,000 shares to illustrate the risks involved, noting that shareholders can lose their investment if the company faces significant losses. The concept of limited liability is also discussed, explaining that shareholders are only responsible for their investment and not their personal assets.
⭐ Preference Shares and Their Benefits
The speaker elaborates on preference shares, explaining that they have priority over equity shares when it comes to receiving dividends. Preference shareholders are guaranteed dividends, even if a company faces losses, and their unpaid dividends from previous years are carried forward. However, unlike equity shareholders, they do not share in the company’s losses. Preference shareholders are treated similarly to creditors, receiving dividends before equity shareholders and having a higher claim in the event of liquidation.
💰 Retained Earnings as a Long-Term Finance Source
Retained earnings are introduced as another source of long-term finance, where a portion of a company’s profits is reserved rather than distributed to shareholders. This retained amount can be used during economic downturns or for future investments, helping the company stay financially secure. The speaker provides an example where a company retains 50 lakh from a 2 crore profit to ensure its long-term stability.
💳 Understanding Debentures and Their Role
Debentures are presented as a critical long-term finance option, functioning like loans that a company must repay with interest, regardless of profit or loss. Debenture holders receive fixed interest payments annually, offering them security and priority in case the company goes under. The speaker explains the difference between interest on debentures and dividends on shares, noting that debenture holders are paid before shareholders in times of financial difficulty.
🏦 Long-Term Loans and Their Purpose
This paragraph discusses long-term loans, which companies take from financial institutions or banks to purchase fixed assets like buildings, machinery, or equipment. These loans help organizations make significant investments in their infrastructure. The speaker highlights that long-term loans are typically aimed at financing large-scale, essential business activities and are a vital source of long-term finance.
🔍 Recap and Importance of Long-Term Finance
The speaker concludes by summarizing the four main sources of long-term finance: equity shares, preference shares, retained earnings, and debentures, with a special focus on shares and debentures. They mention that these topics will be explored in greater detail in upcoming classes to help students better understand how organizations accumulate long-term funds. The importance of mastering these concepts for academic and practical purposes is emphasized, and students are encouraged to stay connected for future lessons.
Mindmap
Keywords
💡Long-term Finance
💡Sources of Finance
💡Equity Shares
💡Preference Shares
💡Retained Earnings
💡Debentures
💡Short-term Sources
💡Medium-term Sources
💡Dividend
💡Liability
Highlights
Introduction to the importance of long-term finance for companies, especially for finance students across various courses.
Explanation of the significance of funds in an organization, emphasizing that proper accumulation and utilization of funds are crucial for success.
Overview of the different types of finance sources: long-term, medium-term, and short-term.
Detailed discussion on long-term sources of finance, defined as funds required for more than five years.
Introduction to the three types of finance sources: long-term sources (over 5 years), medium-term sources (1-5 years), and short-term sources (less than 1 year).
In-depth focus on long-term finance sources, leaving medium-term and short-term sources for later discussions.
Description of the importance of issuing shares as a primary method for accumulating long-term funds.
Explanation of equity shares as ordinary shares, highlighting that equity shareholders are true owners who share in both profits and losses of the company.
Introduction to preference shares, which offer prioritized dividends but do not share in the company's losses.
Comparison between equity and preference shares, emphasizing the different risks and benefits associated with each.
Discussion on retained earnings as a crucial source of long-term finance, used for future uncertainties and ensuring the company's stability.
Explanation of debentures as a secure long-term finance option that provides fixed interest returns regardless of the company's performance.
Highlight of long-term loans, typically used for purchasing fixed assets or major organizational investments.
Summary of the four main sources of long-term finance: issuing shares, retained earnings, debentures, and long-term loans.
Indication that future classes will delve deeper into the specifics of shares and debentures, crucial for practical understanding and exams.
Transcripts
all right
hello dear students welcome to day
because Commerce and management Academy
today we'll see long-term Finance how to
accumulate what are the
what are the sources of long-term
finance that we will say very important
topic as a finance students whether
you're doing bcom BBA MBA M com c and
professional courses like cescm cstma
whatever may be the courses this topic
is must
practical to gain the Practical
knowledge so how the companies
accumulate the
funds and what are the sources
and how they can utilize it all these
things you will be learning in this
chapter don't skip but important topic
now let me tell you funds are the main
important source for every organization
if funds are sufficient if funds are
accumulated properly
if funds are in a proper way utilized in
a proper way then automatically the
company can utilize everything mostly
now the sources of funds what are the
sources of funds how we can accumulate
what are the sources that we have to see
and the sources of funds depends on the
organization
sometimes organization may be small
medium and very big multi-million
organization whatever it may be it
depends on the size of the organization
they require the funds
and the sources different sources are
there I told you now so some
organizations need more of working
capital working capital is for
day-to-day transactions I need working
capital a lot and some organizations may
need long-term Finance to purchase fixed
assets to invest on on their
organization activities they may need
long term but whatever it may be every
organization has its own policies so how
much is required where we can collect it
what are the sources
right all these things will be
discussing
in this class okay mainly if you see
sources of long-term Finance we are
discussing
Finance sources are different first of
all uh the sources of Finance I would
say first rather than long term
forget about this sources of Finance
what are the sources of Finance we'll
discuss then after that sources of long
term Finance we can go ahead
sources of finances three types
first one is long-term sources
and medium term sources and short-term
sources
now long term sources means it is for
long period
when you take any sources when you
collect any funds that is for long
period generally it would be more than
five years
more than 5 years
then we can say it as a long term
sources
we'll discuss in depth later second one
is that medium term sources medium term
sources means these are the medium term
Source medium terms what is the period
period is here 0 to sorry 1 to 5 years
more than one year to one to five years
investment is
one to five is more than one year and
Below five years that we say it as a
medium term sources what are the median
term sources public deposits law and
Loans from commercial Banks and also
leasing Finance these three are we can
say it as a median term sources that is
one to five years third category comes
to short-term sources
short term short term means just below
one year
when you take loan when you take any
funds below one year that is called as
short-term sources this is below one
year
[Music]
what are the short-term sources Bank
credit Trade Credit through the bank we
can take credit and through
organizations also we can take credit
Trade Credit Credit bank credit Trade
Credit installment credit
advances and Commercial papers these are
all the general sources from the banks
itself so those are short-term sources
right now in this class we are not going
to discuss about medium term sources and
short-term sources so this every
organization is having enough knowledge
and when time comes when requirement is
there according to that they are in a
position to accumulate they are in a
position to take the sources of
short-term or medium terms so that is
why we are not going to discuss these
two Now sources of long term Finance we
are going to discuss
this is the major topic of today's class
okay sources of long-term Finance
long-term Financial long-term more than
five years I wanted to get some sources
some Finance I wanted to accumulate then
that is long-term sources in long-term
sources these are the main sources
we'll discuss each and every point right
now and in depth in depth in the coming
classes we'll discuss each and every
point right now I'll give you a briefing
of what are the long term sources first
thing is the tissue of shares chairs are
the main source of accumulating the
funds every organization
share share
so how many shares are there
total two Shares are there
one is issue of shares a company can
issue the shares to accumulate the fund
so first to share is that we can say it
as Equity shares second one is
preparations these two are the main
shares a company can issue what are
these Equity shares
let me give you a briefing so Equity
Shares are we call it as ordinary shares
a company owner's shares company owners
funds also we say why because Equity
shares when we issue
a person who purchases Equity shares he
is eligible to share the profits and
losses of the company
are you getting it so Equity Shield
shareholders they are going to share the
profits and losses of the company laws
also they are going to Bear the company
is in laws the loss also
uh makes difference to the equity
shareholders but up to the limitation of
their shares only
suppose I have purchased around 10 000
Equity shares okay
10 000 Equity shares I have purchased
symphony is under loss
if company is under profit on this
shares I'm going to get every month some
dividend
dividend dividend also fluctuates
dividend fluctuates when companies and
profits lots of profits huge profits are
there then I may get a little bit more
dividend when companies under laws or
may not be much profits dividend will be
less when companies under lock no
dividend at all
companies in total loss then they may
lose even the 10 000 rupees also their
investment if my investment is ten
thousand my investment ten thousand also
I may miss I may not get back this 10
000 also
profits or losses I am going to share
and also if it if the company is under
huge loss 10 000 also I'm not going to
get back
so these are the main two features of
equity shareholders Equity shareholders
means they are the true owners because
they are going to share the profits and
losses if companies under more loss even
their share amount also they may not get
back
so that is why we say them as owners of
the true owners of the company
okay their dividend rate is always block
shares depending on the company's
profits and losses so they are Equity
shareholders but anyway their uh what do
you say their problem problem are there
uh
there is one word I am unable to
recollect it
anyway yeah anyway the liability
capacity is up to this 10 000 only not
more than that
up to ten thousand liability
and beyond that they are not going to
spare their personal assets only up to
ten thousand companies under huge loss
whatever it may be at the most I may not
get first thing is that I may not get
the profits I may not uh get even the 10
000 rupees out so that's all
personal assets no means liability is
limited up to the shares not their
personal these are the main points
remember about the equity shares second
thing is that preferentials
the word is saying preference
preference shares means a preference
will be given to this preference
shareholders where
when company gets the profits when
companies in profits first dividend
preferences given to these people first
give them dividend then after that we'll
see the equity shareholders
are you getting this point
suppose a company is company got one
crore
one crore profit they got profit this is
okay
when company gets a profit of one crore
first of all they'll think about
Distributing this profit in the form of
dividend first the reference
shareholders
preference shareholders first
at what rate already decided something
say 12 or 15 something so according to
that they'll be given they are not going
to Bear the losses
they are not going to share the losses
of the company they are going to share
only the profits only that is why we say
the mother preference shareholders
this is first point remember second
Point related to the preference
shareholders are when company is under
loss
companies under loss this year the
company is unable to pay the dividend to
the shareholders next year they'll take
next year accumulated last year and this
year also
anyway they are going to get the
uh their their dividend they're doing
this year or last year whatever it may
be everything they are going to get that
is why we say them as a preference
shareholders but true owners of the
company who are they Equity shareholders
because they are bearing the losses and
also profits sharing everything
companies under loss even their shares
amount also they may lose it but here it
is not like that at any cost First
preference is given to this preference
shareholders to get the dividend then
whatever is left out of this one crore
that will be distributed to the Equity
shareholders and that will be used for
some other sources some other activities
but preference is given to the
preferential holders
they are just like creditors of any
company
getting it issue of shares Equity shares
preferences very important please
remember this is main source of getting
the long term Finance in long term
Finance whenever you want you'll think
about issuing of shares what should I
issue preferences are
equally shares how many preference
shares I have to issue and how many
Equity shares I have this that depends
on the organization
getting it now Second Source is that
retained earnings
retained earnings is also another
long-term Finance Source what is retain
earning you must know first of all let
me clear this area
what is written learning whenever a
company gets a lots of profits
whenever company gets lots of profits
say a company got two crores of profit
company got two crores of profit out of
two crores
what do they do to crits are they going
to distribute and type 2 crores to the
preference shareholders and Equity
shareholders in the form of dividend no
any wise company they do not do such
kind of activity out of two groups some
amount say for example 50 lakh
50 lakh they wanted to keep it as
retained earnings
retained earnings means this is the
amount taken from the profits every year
they get the profits whenever they get
lots of profits out of their submit some
amount assumed that 50 lakh it can be
anything depending on the organization
position depending on the profits okay
assume that so 50 lakh they kept it as a
retained earnings retained earnings are
for the future uncertainty activities
in future anything happens to the
organization due to recession due to
Market condition
our company is under loss the in such
cases this amount is going to work like
results
this government they can use it
written and if this will protect the
organization
this will gives the confidence to the
organization returned earnings the more
written earnings companies having means
the company is in a very good position
safe position
no doubt at all so that's about the
retain earnings retain earnings also
always long term
I kept it out of two crores 50 lakh as
written earnings 50 lakh is going to
utilize by the organization for long
period long period whenever any
uncertainty is there then they can use
it otherwise that will retain in the
organization itself only
this is also another long-term Source
very important one third one is the
debentures
debentures uh like companies issuing
shares now in the same company can issue
a debentures also
debentures are one of the important
Source long-term source of any
organization so debentures means suppose
a company is issuing uh debentures of
say
10 uh 10 000 or 1 lakh one lakh say
is issuing
debentures are compulsory and it is like
a credit cards to the organization
they have to pay back at any cost
though the companies under loss also if
the company is closing position still
first preference will be given to the
debenture holders let them to get back
their money
debentures supposedly one one lakh I
have a company has issued company issued
one lakh out of this I have purchased
say 1000 debentures
my investment is 1000 purchasing of
debentures when I purchased debentures
of 1000 on this I am going to get
interest
foreign
shares Equity shares of different shares
I get dividend
if I purchase dividend uh debentures
then I get interest interest it always
decided in the beginning itself only
like 12 percent dividend will be given
to the debenture holders 12 percent
means every year I'll be getting 12
percent only not more than that or not
less than this
so that's the interest I'm going to get
every year
whatever may be the position of the
company companies under loss company is
not getting huge profit or companies
getting lots of profit doesn't matter as
per the decision I'll be getting 12
percent interest on this debentures
if company is closing winding up at that
position also first preference will be
given to the debenture holders first pay
off everything
whatever they have invested by the
debenture holder pay off them first
then after that we'll see the
shareholders in shareholders first whom
do you prefer preference shareholders
and next last list
preference is given to the equity
shareholders are you getting this point
very important
okay that's about the debenture holders
The Venture holders are always on the
safe side they'll be getting their
investment is safe they'll be getting
every year interest whatever is decided
okay so this is also one of the best
source to gain the in the long term
finance and last one is that long term
loans
long-term loans means generally they
take loans from any organization from
financial institutions are from any
place
to purchase the fixed efforts
any fixed assets wanted to purchase
this is to purchase any fixed assets
main purpose is this for this purpose
taking Long Term Loan
uh purchasing fixed as I suppose I
wanted to establish your organization
I need a lots of equipments building I
need Furniture I want Machinery I want
Office tables and set up everything I
want for that purpose ready to take the
Long Term Loan it can be taken from
anyone from the financial financial
institutions or from the banks from
anywhere you can take but main purpose
is to purchase the fixed asset or uh for
repair a re-establishment renovation any
such kind of activities we can go for
the long term Finance these are the main
four sources to get the long-term
Finance
each and every Point issue of shares and
Depends these two are the main important
points and related to the retained
earnings and long-term loans there is
nothing much to discuss just to have an
idea is enough but about the issue of
shares
both
preferences and Equity shares these two
are debentures these two points we are
going to discuss in depth in the coming
classes
because you must know what what are the
shares if you have idea then only you
will be in a position to get the shares
in the coming coming years so that is
with these two topics will discuss in
depth in the coming classes hope it is
clear very important
gain the knowledge and of course
examination point of you also very
important how do you accumulate the
sources what are the sources
off funds so this is important
stay connected in the coming classes
we'll discuss about the shares and
debentures in them okay and by the way
don't forget to share this videos stay
connected and study well have a bright
careers good luck
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