Financial Management- Concept

Every organisation whether small or large it needs funds for its day-to-day operations. The funds needed for day-to-day operations is called working capital. It is used to maintain current assets such as stock of material, bills receivables and to meet current expenses like salaries, wages, taxes, rent, etc. The amount of working capital required varies from one organisation to another depending on its nature.

For example a business unit selling goods on credit, or having a slow sales turnover would require more working capital as compared to another unit selling its goods and services on cash basis or having a speedier turnover.

Moreover, a trader would require a higher working capital than a manufacturer.

On the basis of period, the different sources of funds can be classified into three parts long-term sources, medium-term sources and short-term sources.

Short term financing means fulfilling requirement of funds for a short perod through short term funds. Short-term funds are those which are required for a period not exceeding one year, such as overdraft, loans from commercial banks and commercial papers.

This type of financing is used for financing of current assets such as receivables, inventories etc. Seasonal businesses often need short term financing for the interim period between seasons to secure inventories. Moreover, wholesalers and manufacturers whose major portion of working capital is in the form of inventories, need short term financing.

Various sources of funds are available for a business organisation. The type of source which will best suit the needs of the business, depends upon a combination of factors, such as the form of organisation, its financial strength, purpose of borrowing, associated cost, control of management and associated risk.

For example, if a business needs funds for meeting fixed capital requirements, long term funds may be required. Similarly, if the purpose is to meet the day-to-day requirements of business, the short term sources may be used.

Since each source of fund has its own merits and demerits, it is advisable for a business to use a combination of sources, instead of relying on a single source. Hence, there is no single source which will best suit a business.

Working capital requirement.