Institutional Structure

and
Finance
 Finance, which has been described as the
“life Blood of Industry”
 It is a pre-requisite for the mobilization of
real resources to organize production,
marketing and other functional areas.
 Depending upon the nature of the activity to
be financed, business requires-
 Short-term finance
 Long-term finance
 Medium term Finance
 Short-term Finance

 Refers to the funds required for a period of

less than one year.
 Required to meet variable or working capital
requirements.
 It includes sources like banks, trade credit,
installment credit and customers advances.
 Medium – Term Finance

 Finance for the period of one year to five years may be

regarded as a medium-term finance.
 Medium – term finance usually required for working
capital, small expansions, replacements, modifications
etc.
 Medium –term finance may be raised by
 Issue of shares
 Issue of debentures
 Borrowing from bank
 Finance Institutions
 Ploughing back of profits
 Long– Term Finance

 Finance for the periods exceeding 5 years are regarded

as long terms funds.
 Long – term finance is required for procuring fixed assets,
establishment if existing business, modernization etc
 The important sources of long –term finance are
 Issue of shares
 Issue of debentures
 Loans from financial Institutions
 Public deposits
 Lease financing
 Retained earning
 Working capital

 “ Working capital is the difference between

the inflow and outflow of funds”
 Working capital is difference between
current assets and current liabilities.
 Working capital required to manage the day
today operations of the organization.
 Types Working Capital

1. Net Working Capital

 Is the difference between current assets and
current liabilities.
2. Gross Working Capital
 The amount of funds invested in the various
components of current assets.
3. Permanent Working Capital
 The minimum amount of current assets which
is needed to conduct a business even during
the dullest season of the year.
 Types Working Capital

4. Variable Working Capital

 Additional assets which are required at
different times during the operating year
5. Balance sheet Working Capital
 The balance sheet working capital is one
which is calculated from the items appearing
in the balance sheet.
 Factors determining Working capital

 Nature of Industry
 Demand of Product
 Technology
 Time
 sales
 Business Cycle
 Production cycle
 Variations in sales
 Credit control
 Methods of Estimating Working Capital

 There are two methods-

1. Conventional Method
 According to the conventional method, cash
inflows and outflows are matched with each
other.
 Greater emphasis is laid on liquidity.
 Greater importance is attached to current
ratio, liquidity ratio.
 Methods of Estimating Working Capital

3. Operating Cycle Method

 In this method the length of time ( operating
cycle) is calculated.
 Length of tine is time required to convert
cash into resources, resources into final
product, final product into receivables and
receivables into back into cash.
 Methods of Estimating Working Capital

 There are four major components of the

operating cycle of a manufacturing company-
 The cycle starts with capital in the form of cash
and credit, followed by investment in in
materials, manpower and the services.
 Production phase
 Storage of finished goods and sales
 Cash and account receivable collection period.
 Methods of Estimating Working Capital

 When new liquid capital becomes available for

recommitment to production activity, a new operating cycle
begins.
 This method is more dynamic and it refers to computing
working capital in a realistic way.
 Different component of working capital are directed to
fullest utilization of plant and machinery.
 This method considers production and other business
operations, and forecasts the changes that may be
necessary in the pursuit of the future activity.
 Indian Constitution

 The Indian Constitution incorporates a number of matters that

are economically very significant and have far reaching
implications.
 The constitution of India is the most significant document
which is fundamental to the governance of the state.
 The constitution has three parts
 Preamble
 Fundamental rights and duties
 Directive principles of state policy
 Preamble

 The preamble is an introduction to the constitution and contains

its basic philosophy.
 The Preamble to the Indian Constitution States that-
“ We the people of India having solemnly resolved to constitute
ourselves into a sovereign, socialist, secular, democratic, republic
and to secure to all citizens.
 Justice, social, economic and political
 Liberty of thought, expression, belief faith and worship.
 Equity of status and opportunity;
 Preamble

and to promote among them all fraternity

assuring the dignity of the individual and the
integrity of the nation.”
Fundamental Rights and Duties
 Directive Principles

 The directive principles of state policy is a unique feature of

India’s constitution.
 The directive principles are in the nature of directions to the
legislative and executive that they should exercise their authority
in such a way manner as to ensure due respect to these
principles.
 The directive principles may be classified under four heads-
1. Provisions dealing with welfare (Article 38, 42, 45, 47)
 State shall promote the welfare of the people by securing a social
order with justice- social, economic, political.
 Directive Principles

2. Provisions dealing with Social justice (Article 39, 41,43,46)

 State shall direct its policy towards securing-
 Adequate means of livelihood to all citizens
 Proper distribution of material
 Equal pay for equal work
 Prevention of concentration of wealth.
 Protection of child hood and youth against exploitation
 Directive Principles

3. Provisions Promoting democracy (Article 40,44, 45)

 The state shall take steps to organize village panchayats
and endow them with such powers and authority as may
be necessary to enable them to function as units of self-
government.
4. Miscellaneous Provisions (Article 48, 49, 50, 51)
 Organization of agriculture and animal husbandry.
 Safeguard of the forests and wild life
Constitutional
Environment
 Constitution

Judiciary Executive Legislative

Central List Concurrent List State list

Central Govt. State Govt. Local Govt.

Direct Policies, Developm Regulatory

Involvement guidelines, ental
Budget in Business codes and Organizati Organizatio
laws ons ns
Constitutional Environment