Meaning of Capitalization Capitalization is an important constituent of financial plan. ln common parlance, the phrase ‘Capitalization’ refers to total amount of capital employed in a business. However, scholars are not unanimous in so far as capitalization is concerned. The term capitalization connotes the process of determining the quantum of funds that a firm would require to run its business. Capitalization is distinct from share capital which refer only to the paid-up value of shares issued and definitely excludes bonds and other forms of borrowings. Similarly, it should be distinguished form ‘capital’. The term capital refers to the total investment of a company in money, tangible assets like goodwill. It is in a way the total wealth of a company. When used in the sense of net capital, it indicates the excess of total assets over liabilities. Here, then, it includes “the gains or profits from the use and Continue reading
Business Finance Terms
Provision for Depreciation
Depreciation is the cost allocated as expense which has the effects of reducing the value of a fixed asset during the period it is used by a business. It is a non-cash expense and need to be charged to the Profit & Loss account yearly which lowers the company’s profit which increasing free cash flow. Fixed assets are long life. They are bought to assist in the operation of business but not with the main purpose of resale. They are in fact revenue-generating assets as they help to gain profit depending on their useful lives. Depreciable items include machinery, vehicles, buildings and fixtures. There are reasons why assets may depreciate: Obsolescence: Assets are replaced because new and more efficient technology has been developed. Depletion or Exhaustion: The values of assets such as mines, quarries and oil wells diminish due to the extraction of raw materials from them. Passage of Time: Continue reading
Lease vs Hire Purchase
The concept of leasing can be understood by comparing the lease to the purchase of a specific asset. If a firm wishes to obtain the service of a specific asset, it has two alternatives: Purchase or Lease. To purchase the asset, the firm must payout a lump sum or agrees to some type of installment plan that involves incurring a long term liability. Leasing the assets, on the other hand, provides the firm with asset’s services without necessarily incurring any capital liability. Leasing is a source of financing as it enables the firm to obtain the use of assets in exchange for agreeing to pay lease rentals. In case of leasing, the asset is handed over by the lessor to the lessee in return for a lease rental. The ownership and the title to the assets remain with the lessor. The lessor, however, recovers the cost of the assets as Continue reading
Sources of Finance: Public Deposits
From the company’s point of view, public deposits are a major source of finance to meet the working capital needs. Due to the credit squeeze imposed by the Reserve Bank of India on bank loans to the corporate sector during 1970s – 1980s and also due to the recommendations of the Tandon Committee, restricting credit, many companies were not getting as much money in the 1980s as they used to get, in the past, from the banks. So, public deposits came handy as working capital fund for businesses. While to the depositor, the interest rate offered is higher than that offered by banks, the cost of deposits to the company is less than the cost of borrowings from bank. Moreover, the availability and volume of bank credit are restricted by consideration of margin, security offered, periodical submission of statements etc. The credit available to companies through public deposits is not Continue reading