Planning and Estimating Resource Requirements
Class 11 CBSE Entrepreneurship — Business Finance, Financial Planning, and the Capital Structure
Business Finance — Meaning and Importance
The entrepreneur's most critical problem
Finance is referred to as the "lifeblood of enterprise," having persistent demand.
The demand for finance is not only recurring but ever mounting to meet ever-increasing requirements of capital for: commencement, day-to-day operation, modernization activities, expansion, diversification, and research and development activities.
Finance is the master key which provides access to all the other resources for being employed in manufacturing and merchandising activities.
Commencement, sustenance, and growth of the business all depend on timely procurement and optimum utilization of finance, which is available only against the "cost" — interest if using borrowed capital or dividend if using equity capital.
Business finance is concerned with the planning, raising, controlling, and administering of the funds to be used in the business.
Where a chai stall needs finance — again and again
Commencement: ₹8,000 for a stove, kettle, and the first stock. Day-to-day: ₹600 every morning for milk, tea leaves, and sugar. Modernization: a ₹4,000 insulated urn so tea stays hot in winter. Expansion: a second stall at the bus stop. The demand never stops — which is why finance is called the lifeblood.
Financial Planning
(a) Funds requirement decision
Concerned with estimation about the total funds or capital requirements.
(b) Financing decisions
Concerned with the sources from which the funds are to be raised.
Case Study — Subhiksha
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Case Study — Nagarjuna Finance
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Think about it — the same mistake at school scale
A stationery shop owner borrows ₹1,50,000 in March to stock exam-season pens, registers, and notebooks. Sales are excellent — but only ₹60,000 comes back before the supplier's payment is due in April. The shop is “profitable” on paper and still cannot pay. Subhiksha and Nagarjuna Finance failed on the same gap: money was coming in, but not when it was needed.
How much money is needed?
The total amount of finance required for implementing the business plans. Assessment of capital requirements.
Objectives of Financial Planning
To assess the different types of financial requirements — long, medium, and short-term funds (capitalization).
To procure funds from suitable sources, keeping in view principles of economy, convenience, financial commitments, ownership (capital structure).
To allocate funds to various departments to achieve predetermined objectives.
To establish effective control on financial matters.
To provide optimum amount of working capital requirement.
To build up reserves for future contingencies.
Fixed Capital vs Working Capital
| Aspect | Fixed Capital | Working Capital |
|---|---|---|
| Definition | Funds required for acquisition of assets used over a long period | Capital needed for financing working or current requirements and day-to-day operational expenses |
| Quote | "Funds required for meeting the permanent or long-term needs of the business" — Shubin | "Capital which is not fixed; the difference between book value of current assets and current liabilities" — Hoagland |
| Purpose | Purchase of fixed assets: land, building, plant, machinery | Day-to-day operational expenses, raw materials, wages, overheads |
| Duration | Long-term (5+ years) | Short-term (up to 1 year, revolving) |
| Sources | Shares, debentures, public deposits, ploughing back of profits, long-term borrowings | Short/medium-term bank borrowing, public deposits, finance companies, internal sources |
| Withdrawal | Not easy to withdraw — more like permanent capital | Recovered through sale of finished goods; revolving |
| Risk | Higher — locked in for long period | Lower — recovered quickly |
Fixed Capital
Factors affecting fixed capital requirement
- •Nature of business: trading, manufacturing, services
- •Size of the business: small business needs less fixed capital
- •Technology to be used: capital intensive vs labor intensive
- •Range of production: more diversified products = more fixed capital
- •Type of product: simple (soap) vs complicated machinery
- •Method of acquisition: buying demands more capital vs lease/hire purchase
Arrangement of fixed capital
Working Capital
Factors determining working capital
- •Nature and size of business — production requires more working capital than trade services
- •Business Cycle — boom period needs more working capital than depression
- •Gestation Period — longer time gap = more working capital needed
- •Volume and procurement of raw material — higher raw material cost = higher working capital
- •Manual vs automation — labor-intensive needs more working capital
- •Need to stock up inventories — larger stocks = more working capital
- •Turnover of working capital — faster recovery = less working capital needed
- •Terms of Credit — selling on credit needs more working capital than cash sales
Arrangement of working capital
Fixed vs working at the samosa stall
The cart, stove, and weighing scale cost ₹25,000 once — that is fixed capital, and the stall owner cannot get that money back easily. Potatoes, flour, oil, and chutney cost about ₹2,000 every morning — that is working capital, and it comes back by evening as sales. A stall with a ₹25,000 cart but no ₹2,000 for ingredients sells nothing; a stall with ingredients but no cart sells nothing either. Both are needed — in the right proportion.
Capitalization and Capital Structure
(a) Over capitalized
Surplus funds earning below expected returns.
(b) Under capitalized
Shortage of funds hampering operations.
Four patterns of capital structure — tap each card to see how the layers of capital combine:
The proportion is the point
The same ₹1,00,000 café, three ways
Pattern 1: A student funds her café entirely with ₹1,00,000 of own savings — all profit is hers, but all risk is hers too. Pattern 3: She puts in ₹60,000 and takes a ₹40,000 bank loan at 11% — she keeps full control, but ₹4,400 of interest is due every year even in a bad month. Pattern 2: She brings in a partner who invests ₹40,000 for a fixed 8% return — steadier for the partner, and the student keeps more of the upside than she would with an equal equity partner.
Key Takeaways
- Sound financial planning is necessary for the success of any business enterprise. So what? Subhiksha had 1,600 outlets and still collapsed — planning matters more than size.
- Both surplus and shortage of funds are injurious to the financial health of the enterprise. So what? Over-capitalization and under-capitalization are two different diseases with the same symptom — falling profits.
- Financial planning ensures solvency, liquidity, sufficient funds, optimum use of sources, and preparation for future challenges. So what? These are the five things an investor actually checks before funding you.
- Fixed capital is invested in long-term assets; working capital handles day-to-day operations. So what? A ₹25,000 cart needs a long-term source; ₹2,000 of daily ingredients needs a short-term one.
- Capital structure determines the patterns of financing — the types of securities issued for raising necessary funds. So what? Choosing between equity, preference, and debentures decides who controls your company and who gets paid first.
- The ideal debt-equity mix maximizes the value of a company's shares in the market. So what? The mix is not about how much money you can raise — it is about how much you can safely owe.