Mahatma Education Societies PILLAIS COLLEGE OF ARTS, COMMERCE AND SCIENCE RE-ACCREDITED BY NAAC WITH A GRADE A PROJECT ON COMPARATIVE

STUDY OF SOURCES OF FINANCE In the subject FINANCIAL MANAGEMENT SUBMITTED TO UNIVERSITY OF MUMBAI FOR SEMESTER-IV OF MASTER OF COMMERCE BY KANNAN PRAKASH Roll No-3607 UNDER THE GUIDANCE OF PROF. MONALI RAY YEAR 2014-2015

Website : www.pcacs.ac.in 0227483208

Tel :02227451700 Fax:

Mahatma Education Societies PILLAIS COLLEGE OF ARTS, COMMERCE AND SCIENCE RE-ACCREDITED BY NAAC WITH A GRADE ___________________________________________________________________ Dr. KM. Vasudevan Pillais Campus, Sector 16, New Panvel

DECLARATION BY THE STUDENT

I, Prakash Kannan student of M.com part -2 Roll Number 3607 hereby declare that the project for the Paper financial management Semester-IV during the academic year 20142015, is based on actual work carried out by me under the guidance of Prof. Monali Ray I further state that this work is original and not submitted anywhere else for any examination. Signature of student EVALUATION CERTIFICATE This is to certify that the undersigned have assessed and evaluated the project on financial management submitted by KANNAN PRAKASH student of M.com Part-2. This project is original to the best of our knowledge and has been accepted for internal assessment.

Internal Examiner

External Examiner

principal

Internal Assessment: project 40 Marks Name of the Student

First Name Father Name Surname : KANNAN : PRAKASH :

Class
MCOM PART-2

Division Roll Number 3607

SUBJECT

: FINANCIAL MANAGEMNT

TOPIC FOR THE PROJECT: comparative study of sources of finance

Marks Awarded DOCUMENTATION Internal Examiner (Out of 10 Marks) External Examiner (Out of 10 Marks) Presentation (Out of 10 Marks) Viva and Interaction (Out of 10 Marks)

Signature

TOTAL MARKS (Out of 40)

ACKNOWLEDGEMENT I would like to thank my college i.e. Pillais college of Arts, Commerce & Science, New Panvel where I have gained plenty of knowledge which help me turning this project a success. Apart from my efforts, the success of any project depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project. I would specially thank my Professor Monali Ray and other faculty members for giving their valuable guidance in the design and changes that were required to be made for the proper implementation of the project. Without those efforts this project would not be have been successful. I would also extend my thanks to our vice Principal Mr A.N Kutty for his support and facilities provided to me for the same. Lastly I would like to thanks all those who directly and indirectly helped me in completion of this project.

INDEX Sr.no.
1)

TOPIC
Introduction of sources of finance

Pg. No.

2)

Classification of sources of finance

3)

Time-period

4)

Ownership and control

5)

Profile of companies

6)

Balance of companies

7)

Analysis

8)

Bibliography

CHAPTER: 1 INTRODUCTION OF SOURCES OF FINANCE

Where borrowers get their money from. In the case of corporations there are two sources: internal (the cash they generate from their businesses) and external (the funds they procure from the CAPITAL MARKETS). There are various sources of finance such as equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources are useful under different situations. They are classified based on time period, ownership and control, and their source of generation. Sources of finance are the most explored area especially for the entrepreneurs about to start a new business. It is perhaps the toughest part of all the efforts. There are various sources of finance classified based on time period, ownership and control, and source of generation of finance. Having known that there are many alternatives of finance or capital, a company can choose from. Choosing right source and right mix of finance is a key challenge for every finance manager. The process of selecting right source of finance involves in-depth analysis of each and every source of finance. For analyzing and comparing the sources of finance, it is required to understand all characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified.

CHAPTER:2 CLASSIFICATION OF SOURCES OF FINANCE

A business might have access to various sources of financing its needs. These sources of finance can be classified as: Internal and external Internal: this is money raised from inside the business. It includes

Sales of assets: Business might sell off old, obsolete assets

which are no longer used by the business to raise additional cash for the business.

Advantage Better use of capital

Disadvantage A new business might not have any old or obsolete assets

Retained profits: Businesses (especially limited companies)

usually keep some part of the profit every year for future use. This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which can be used for financing the business.

Advantage Does not increase liabilities Not No need to pay interest

Disadvantage available to new

businesses

Reduction in working capital: Cutting the stock levels can also help

the business to raise additional cash.

Advantage Costs related to

Disadvantage May lead to shortage

storage of stock is reduced of stock and loss of sales

External: This is the money raised from outside the business. It includes Short Term Bank overdraft: Bank overdraft is a facility given by banks to its business customers, people having current accounts. Through this facility the customers can overdraw their accounts to a greater value than the balance in the account. To overdrawn amount is agreed in advance with the bank manager. The bank assigns a limit to overdraw from the account and the business can meet its short term liabilities by writing cheques to the extent of limit allowed.

Advantage

Disadvantage No need for are

Interest variable

rates and

collaterals or security.

usually

More flexible

higher than bank loans. Cash flow

and the overdraft amount can be adjusted every month according to needs.

problems can arise if the bank asks for the overdraft to be repaid at a short notice.

Trade Credit: Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry.

Advantage No interest has to be paid.

Disadvantage The business may not get cash discounts.

By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance which can be used for more important expenditures.

Factoring of debts: It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash. Medium Term Hire purchase: It involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in instalments for the period of time agreed upon. The business has to pay an interest on these instalments. Leasing: Leasing involves using an asset, but the ownership does not pass to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets. The business does not need to purchase the asset.

Advantage

Disadvantage

1.The business can benefit from the 1.the total cost of leasing may end up asset without purchasing it. 2.Usually the maintenance of the asset is done by the leasing firm. higher than the purchasing of asset

Medium term bank loan: A bank loan for 1 year to 5 years.

Long term

Long term Bank loan: borrowing from bank for a limited period of time. The business has to pay an interest on the borrowing. This interest may be fixed or variable. variable. Businesses taking loan will often have to provide security or collateral for the loan. Issue of share: It is a permanent source of finance but only available to limited companies. Public limited companies can sell further shares up to the limit of their authorized share capital. Private limited companies can sell further shares to existing shareholders

Advantage Permanent source of

Disadvantage capital. Dividends have to be paid to the

In case of ordinary shares business will shareholders. only pay dividends if there is a profit.

Debentures: A debenture is defined as a certificate of acceptance of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures. It is issued for a long periods of time. Debentures are generally freely transferrable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.

Sales and lease back: this involves a firm selling its assets or property to an investment company and then leasing it back over a long period of time. The business thus can use the asset without purchasing it and can use the revenue earned from its sale for other purposes

CHAPTER:3 TIME-PERIOD
Sources of financing a business are classified based on the time period for which the money is required. Time period are commonly classified into following three:

Long Term Sources of Finance: Long term financing

means capital requirements for a period of more than 5 years to 10, 15, 20 years or may be more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc of a business are funded using long term sources of finance. Part of working capital which permanently stays with the business is also financed with long term sources of finance. Long term financing sources can be in form of any of them:

Share Capital or Equity Shares Preference Capital or Preference Shares Retained Earnings or Internal Accruals Debenture / Bonds Term Loans from Financial Institutes, Government,

and Commercial Banks

Venture Funding Asset Securitization International Financing by way of Euro Issue,

Foreign Currency Loans, ADR, GDR etc.

Medium Term Sources of Finance: Medium term

financing means financing for a period between 3 to 5 years. Medium term financing is used generally for two reasons. One, when long term capital is not available for the time being and second, when deferred revenue expenditures like advertisements are made which are to be written off over

a period of 3 to 5 years. Medium term financing sources can in the form of one of them:

Preference Capital or Preference Shares Debenture / Bonds Medium Term Loans from
o o

Financial Institutes Government, and

Lease Finance Hire Purchase Finance

Short Term Sources of Finance: Short term financing means

financing for period of less than 1 year. Need for short term finance arises to finance the current assets of a business like inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short term financing is also named as working capital financing. Short term finances are available in the form of:

Trade Credit Short Term Loans like Working Capital Loans from

Commercial Banks

Fixed Deposits for a period of 1 year or less Advances received from customers Creditors Payables Factoring Services Bill Discounting etc.

CHAPTER:4 OWNERSHIP AND CONTROL

ACCORDING TO OWNERSHIP AND CONTROL: Sources of finances are classified based on ownership and control over the business. These two parameters are an important consideration while selecting a source of finance for the business. Whenever we bring in capital, there are two types of costs one is interest and another is sharing of ownership and control. Some entrepreneurs may not like to dilute their ownership rights in the business and others may believe in sharing the risk. 1. Owned Capital: Owned capital is also referred as equity capital. It is sourced from promoters of the company or from general public by issuing new equity shares. Business is started by the promoters by bringing in the required capital for startup. Owners capital is sourced from following sources: 2. Venture Fund or Private Equity Further, when the business grows and internal accruals like profits of the company are not enough to satisfy financing requirements, the promoters have choice of selecting ownership capital or non-ownership capital. This decision is up Equity Capital Preference Capital Retained Earnings Convertible Debentures

to the promoters. Still, to discuss, certain advantages of equity capital are as follows: i. It is a long term capital which means it stays permanently with the business. ii. There is no burden of paying interest or instalments like borrowed capital. So, risk of bankruptcy also reduces. Businesses in infancy stages prefer equity capital for this reason. 3.Borrowed Capital: Borrowed capital is the capital arranged from outside sources. These include the following:

Financial institutions, Commercial banks or General public in case of debentures.

In this type of capital, the borrower has a charge on the assets of the business which means the borrower would be paid by selling the assets in case of liquidation. Another feature of borrowed capital is regular payment of fixed interest and repayment of capital. Certain advantages of borrowing capital are as follows:

There is no dilution in ownership and control of business. Cost of borrowed funds is low since it is a deductible expense

for taxation purpose which ends up saving on taxes for the company.

It gives the business a leverage benefit.

CHAPTER:5 SOURCE OF GENRERATION

ACCORDING TO SOURCE OF GENERATION: 1.Internal Sources: Internal source of capital is the capital which is generated internally from the business. Internal sources are as follows:

Retained profits Reduction or controlling of working capital Sale of assets etc.

The internal source has the same characteristics of owned capital. The best part of the internal sourcing of capital is that the business grows by itself and does not depend on outside parties. Disadvantages of both equity capital and debt capital are not present in this form of financing. Neither ownership is diluted nor fixed obligation / bankruptcy risk arises. 2.External Sources: External source of finance is the capital which is generated from outside the business. Apart from the internal sources finance, all the sources are external sources of capital. Deciding the right source of finance is a crucial business decision taken by top level finance managers. Wrong source of finance increase the cost of funds which in turn would have direct impact on the feasibility of project under concern. Improper match of type of capital with business requirements may go against smooth functioning of the business. For instance, if fixed assets, which derive benefits after 2 years, are financed through short term finances will create cash flow mismatch after one year and the manager will again have to look for finances and pay the fee for raising capital again.

6.PROFILE OF COMPANIES ACC CEMENT

Acc Cements was set up in 1986. In the last decade the company has grown tenfold. The total cement capacity of the company is 18.5 million tones. Its plants are some of the most efficient in the world. With environment protection measures that are on par with the finest in the developed world. The company's most distinctive attribute, however, is its approach to the business. Acc follows a unique home grown philosophy of giving people the authority to set their own targets, and the freedom to achieve their goals. This simple vision has created an environment where there are no limits to excellence, no limits to efficiency. And has proved to be a powerful engine of growth for the company. As a result, Acc is the most profitable cement company in India, and one of the lowest cost producer of cement in the world. When the company started out, it approached the cement business with an open mind. To compete with the older, established players who had already written off their plant cost, it was important to have the lowest capital cost per ton of cement. Their plants would have to be set up in record time. Their capacity utilization would have to be above 100%. And their power consumption would have to set a record low these were the main theme of company. Today, Acc is the 3rd largest cement company in India, with an annual plant capacity of 16 million tonnes including Acc Cement Eastern Ltd. and revenue in excess of Rs.3298 crore. In 1993, Acc Cement set up a complete system of transporting bulk cement via the sea route. Making it the first company in India to introduce bulk cement movement by sea. Others followed and today, about 10% cement travels by this new route.

Bulk Cement Terminals of the company: Surat: Bulk Cement Terminal with a storage capacity of 15,000 tonnes has bulk cement unloading facility.

Galle: 120 kms from Colombo, Sri Lanka. Handles 1 million tonnes of cement annually. Cochin: The latest addition to our configuration of Bulk Cement Terminal Business area of the company:

The company is engaged in manufacture and market cement and clinker for both domestic and export markets.

Milestones:

2010

On 24th February 2010, Acc Cements Ltd (ACL) inaugurated its cement plant (grinding unit) at Dadri, Uttar Pradesh. Capacity: 1.5 million tonnes.. On 27 March, 2010, ACC Cements Ltd (ACL) inaugurated its cement plant (grinding unit) at Nalagarh, Himachal Pradesh. Capacity: 1.5 million tonnes. In December 2010, the Dadri Grinding Unit in its very first year of operation received the Integrated Management System (IMS) Certification, including ISO 9001:2008, ISO 14001:2004, and OHSAS 18001:2007 by BSI (U.K.).

2009- The Company launched its knowledge initiative i.e. Acc Knowledge Center,to enable industry professionals get a first-hand feel of the world of cement and concrete. During the year, three centers became operational in the cities of Jaipur, Ahmedabad and Kolkata. 2008- The Company also sets up the Corporate Communications department, thus marking its deep commitment to be a responsive organisation, answerable and accountable to its key internal and external stakeholders. 2009- The Company launched its knowledge initiative i.e. Acc Knowledge Center,to enable industry professionals get a first-hand feel of the world of cement and concrete. During the year, three centers became operational in the cities of Jaipur, Ahmedabad and Kolkata. Opening of Dadri Plant On 24th February 2010, Acc Cements Ltd (ACL) inaugurated its cement plant (grinding unit) at Dadri, Uttar Pradesh. Capacity: 1.5 million tonnes. On 27 March, 2010, Acc Cements Ltd (ACL) inaugurated its cement plant (grinding unit) at Nalagarh, Himachal Pradesh. Capacity: 1.5 million tonnes. In December 2010, the Dadri Grinding Unit in its very first year of operation received the Integrated Management System (IMS) Certification, including ISO 9001:2008, ISO 14001:2004, and OHSAS 18001:2007 by BSI (U.K.).

Achievements/ recognition: Achievements

Environment protection measure that conform to the worlds best. Benchmarking quality standards for the industry.

Reinventing cement transportation. Ambujanagar has won 'Best Environmental Excellence in Plant Operation' ? National award by NCBM 2009 'Certificate of Appreciation' for Accident Free million man hour our worked - Gujarat Safety Council ? Baroda 2009

Recognition

National Award for commitment to quality by the Prime Minister of India. National Award for outstanding pollution control by the Prime Minister of India. ISO 9002 Quality Certification. ISO 14000 Certification for environmental systems. Best Award for highest exports by CAPEXIL. Economic Times - Harvard Business School Association Award for corporate.

ULTRA TECH.Cement

Ultra Tech.Cement started its commercial production in May 1975 in its first plant Nimbahera in Rajasthan. The company was incorporated in the year 1994. Today Ultra tech. Cement is one of the largest cement manufacturers in north India. It is also second largest producer of white cement in India. The company exports white cement to countries like South Africa, Nigeria, Singapore, Bahrain, Bangladesh, Sri Lanka, Tanzania, UAE and Nepal. The company has two manufacturing facilities located at Nimbahera and Mangrol in the state of Rajasthan. The company produces white cement and its production unit is located in Gotan at Rajasthan. During August 2009, Allahabad HC had sanctioned the scheme of amalgamation of Jaykaycem a wholly owned subsidiary with the company. Jaykaycem was implementing 3 million tones per annum Green Field Grey Cement Plant at Mudhol, District Bagalkot, Karnataka state which was at final stage of implementation. The installed capacity of grey cement of JK Cement with the merger increased to 7.5 million tones per annum. These plants have received various certifications ISO-9001:2000 for quality management system, ISO-14001:2004 for environment management systems and OHSAS-18001:2005 for occupational health and safety systems. Products Ultra Tech Cement produces ordinary Portland cement of 53-grade, 43-grade and 33-grade. It markets these cements under the brand name J K cement and Sarvashakitman. It also manufactures Portland Pozzolana Cement and markets it under the name J K Super.

It markets white cement under the name J K White and Camel. Ultra Tech . Cement has introduced water repellent material in powder form. It has also introduced white cement based putty for plastering walls and ceiling and sells the same under the name JK Wall Puty.

7.BALANCE OF COMPANIES
Balance sheet of ACC cement ltd as at 31st March 2013

Particulars

As 31.03.2013

at As

at

31.03.2012

1.LIABILITIES: 1)share capital 2)reserve and surplus (3) Other Long-Term Liabilities (4) Current Liabilities (a) Trade Payables (b) Other Current Liabilities (c) Short Term Provisions 21,709,412 13,137,302 8,686,019 43,532,733 191,493,584 2.ASSETS (1) Non-Current Assets (a) Fixed Assets : Tangible Assets (b) Long-Term Loans and Advances (c) Other Non-Current Assets 42,927,886 3,531,322 900,000 47,359,208 36,767,305 5,527,463 42,294,768 4,508,032 9,317,013 5,884,107 19,709,152 137,632,239 119,134,886 27,726,853 1,099,112 90,299,871 27,185,794 437,422

(2) Current Assets: (a) Cash and Bank Balances (b) Short Term Loans and Advances (c) Other Current Assets 119,921,012 21,452,734 2,760,630 144,134,376 191,493,584 75,463,196 75,463,196 2,609,608 95,337,471 137,632,239

Ultra Tech cement Balance sheet as at 31st march 2013

Particulars

As 31.03.2013

at As

at

31.03.2012

1.LIABILITIES: 1)share capital 2)reserve and surplus (3) Other Long-Term Liabilities (4) Current Liabilities Short term borrowings (a) Trade Payables (b) Other Current Liabilities (c) Short Term Provisions 1,886,543 1,965,166 4,509,128 649,566 828,271 1,765,557 4,264,743 518,114 699,272 16,274,593 13,035,091 699,272 14,590,798 13,136,719

39,019,359 2.ASSETS (1) Non-Current Assets (a) Fixed Assets : Tangible Assets (b) Long-Term Loans and Advances (c) Other Non-Current Assets 23,618,022 2,283,518 1,692,988 28,694,414

35,803,474

23,118,788 839,407 108,419 24,956,471

(2) Current Assets: (a) Cash and Bank Balances (b) Short Term Loans and Advances (c) Other Current Assets 3,324,573 1,167,058 66,848 10,324,945 4,324,899 1,941,225 115,355 10,847,003

39,019,359

35,803,474

CHAPTER: ANALYSIS

points

ACC cement
higher than ultra tech cement.

Ultra Tech cement

is less than Acc cement.

1. Share capital Share capital of acc cement is Share capital of ultra tech cement

2. Rese5rve and surplus

Reserve and surplus of acc Reserve and surplus of ultra tech cement is more than ultra tech cement is less than acc cement. cement.

3. Other term

long Long term liabilities of acc Long term liabilities of ultra tech cement is less than ultra tech cement is more than acc cement. cement. ACC cement ltd has more trade Ultra Tech cement ltd has less payables as compared to Ultra trade payables as compared to acc Tech cement. cement. other It has less amount of other current liabilities.

liabilities 4. Trade payable

5. Other current liabilties 6. Short

It has more amount of current liabilities .

term Short term provision of acc Short term provision of ultra tech cement is higher. cement is less.

p[rovision 7. Fixed assets

Acc cement ltd has more amount Ultra Tech cement ltd has less

of fixed asset.

amount of fixed asset.

8. Long loans

term Long term loans and advances of Long term advances and loans of and acc cement are high. ultra tech cement is less.

advances 9. Other current assets 10. Cash bank balances and ACC cement ltd have more cash Ultra Tech cement ltd have more and bank balances as compared to cash Ultra Tech cement. and bank balances as ACC cement ltd have less other Ultra Tech cement ltd have more current assets. other current assets.

compared to ACC cement.

11. Short loans

term It has more short term loans and It has less short term loans and and advances compared to ultra tech advances as compared to acc cement. cement.

advances

12. Other current assets 13. Sources finance

The other current assets of acc The other current assets of ultra cement are high. tech cement are less.

of The sources of finance of acc The sources of finance of ultra cement as compared to ultra tech tech cement as compared to acc cement are higher. cement are lesser.

9. BIBLIOGRAPHY Website: https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html http://www.business.gov.au/BusinessTopics/Business-Finances/Seek-businessfinance/Investigate-your-finance-options/Pages/Sources-of-finance.aspx

Book: Advanced financial management