Capital / Funds

Capital other than human capital is the most important element in the existence of any organisation and can be considered as single most goal of the organisation, i.e. making money. Capital can be described as anything which is ready money and capable of buying resources for the organisation.

Funds are required for all purchases all the times at all the places:

    • Conception of an idea of an organisation may be through market survey;
    • Organisation formation;
    • Human cost;
    • Raw material cost;
    • Land buy / lease cost;
    • Acquisition of all the fixed assets;
    • Investments making;
    • Loans and advances payments
    • etc.

Once locked into the assets, many of these assets lose value over a period of time. There is loss of value in all assets except land, liquid and current assets unless the latter assets have defective / tainted titles / purchased when the same were over-prices.

Even replacement of assets requires capital.

Sources of Funds

Funds can come from any source.

    • Entrepreneur’s personal capital;
    • Others’ capital willing to partner with entrepreneur (i.e. shareholders interested in enjoying dividend, capital appreciation and voting rights for participation in the affairs of organisation);
    • Institutional Lenders (like Bankers / Financial Institutions / Mutual Funds, etc.);
    • Other Non-institutional lenders (like individuals, etc.);
    • Governments’ grants / assistance / lenders;
    • Profits of the organisations (i.e. internal accruals)

Expectations of Funds’ provider

Organisation has to first generate the confidence of the person parting its capital and sharing with the organisation. Expectations are:

    • Safety of principal (i.e. the same would be repaid on the due dates promised) ;
    • Regular earnings (like dividend, interest, etc.) on the principal;
    • Regular communication about the workings of the organisation to ensure that the fundamentals of the organisation have not changed;
    • Prompt clarification about market rumours about organisation’s working, if any and no hiding;
    • Transparency in dealings;
    • Transparent Title transfer / mortgaging / pledging of securities / guarantees in the name of capital provider.

Internal Funds Vs. External Funds

Internal Funds

Internal funds are earnings of the organisation. Every sale of goods /services results in earning of the organisation. The net earnings after meeting all costs create internal reserves for further expansion or re-investment into the existing processes. There is a constraint on internal funds and these are built over a period of time. Shortfall of funds can be met through external funds.

External Funds

External funds carry the agreed (i.e. fixed returns) / pre-conceived returns (in case of equity funding). These funds may demand security in the shape of bank / corporate guarantees or pledging of securities / assets in favour of lenders. Also, the conditions can be enforced as regarding participation in management or maturity at a certain price, etc.

Developments in the Funds Generation

    • Private equity funding (i.e. funding by participation in equity capital of the organisation and investor sharing ownership of the organisation by participating in decision making with the exit clause of selling its stake at pre-determined returns after a certain period generally for longer duration);
    • Securitisation of assets (i.e. converting illiquid assets like fixed assets or long term receivables or future earnings, etc. into securities and selling to the investors);
    • Factoring (i.e. securing funds against receivables by passing on the rights of collection to factoring agency with / without recourse in case of failure);
    • Active Treasury Function (i.e. currency / commodity / stock / securities futures and options, business acquisition and sale, etc.)

Traditional / Normal ways of working in Funds Generation

    • Self-generated capital;
    • Borrowings from Banks / Financial institutions, etc.;
    • Public issue at Stock Market;
    • Private placement of equity;
    • Inter-corporate deposits;
    • Fixed deposits

Conflicts in Funds generation

    • Leveraging (i.e.  buying assets on instalments or by giving margin money. The rest amount is funded from borrowed money. This way organisation can create more assets with internal funds available with it, e.g. organisation can acquire assets worth INR 500 with INR 100 available, i.e. by giving margin of 20%. But, INR 400 would be repaid over the years. Unless the organisation earns from the new / existing assets or arrange the funds from alternate sources , there would be pressure on future earnings.
    • Sub-prime crisis was result of over-leveraging where borrowers took the money beyond their earning capacity and invested in real estate expecting asset value to appreciate in future. Reversal of appreciation phase result in loops of defaults.)

Some of the Process Implementation for Funds Generation

    • Funds Generation
      • Maintenance of ‘Loan Register’ giving details of
          • date of acceptance,
          • due date of repayment,
          • interest rate,
          • interest periodicity,
          • interest amount,
          • due dates of interest payment,
          • actual date of interest payment,
          • securities given,
          • principal repayment date,
          • securities release date.
      • Exploring alternate funding agencies with better terms & conditions.
      • Exploring new instruments for better terms & conditions
      • Exploring countries providing funds with cheaper rate of interest and for longer tenure.
    • Periodical / Full & Final payments
      • Reminder schedule for payment of
          • Instalment
          • Interest
          • Principal amount
      • Details of payment
          • Date of payment
          • Cheque / NEFT details
      • Comparison of terms & conditions of existing borrowed funds and switch over to new with better terms & conditions → saving of interest, etc. and release of pledged securities.
    • Documents
      • Summary of terms & conditions,
      • Original contracts,
      • Securities charge / pledge / etc. documents,
      • Receipts for payment of instalment, interest, final principal amount, etc.,
      • Confirmation of full & final repayment,
      • Securities release documents.

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