Class 11 Business Studies Notes for Chapter 8 Sources of Business Finance
Get Class 11 Business Studies Notes, Questions and Practice Papers for Chapter 8 Sources of Business Finance. Candidates who want to pass Class 11 with a good grade can use this article for Notes, Questions, and Practice Papers.
We have provided access to the Class 11 Business Studies Notes, Important Questions and Practice Paper on Chapter 8 Sources of Business Finance. You can practise the questions and check your answers using the solutions provided after each question.
Chapter Definitions and Short Notes
Chapter 8 Sources of Business Finance – Short Notes and Definitions
Sources of Business Finance
This chapter outlines where businesses can obtain funds to start and operate. It discusses the benefits and drawbacks of various funding sources and highlights factors to consider when selecting an appropriate finance source. Understanding the different ways to raise money and their pros and cons is crucial for anyone planning to start a business, to make an informed decision on funding.
Short Pointers:
- Sources of Funds: Lists where businesses can get money.
- Advantages and Limitations: Explains the good and bad sides of each funding source.
- Factors for Choosing: Details what to think about when picking a finance source.
- Importance for Start-ups: Emphasises the need for new businesses to understand funding options.
- Decision Making: Guides on choosing the right source based on merits and demerits.
Meaning Of Business Finance
Business finance means the money businesses require to make and sell goods and services to meet society’s demands. It’s like the blood that keeps a business going, covering all the funds needed to begin, operate, grow, and change a business. The main aim of business finance is to boost the company’s worth. It’s vital for starting a business, handling economic ups and downs, growing, repaying debts, and taking advantage of new chances.
Short Pointers:
- Definition: Funding needed for business activities.
- Importance: Acts as the lifeblood of business; crucial for operational and strategic needs.
- Nature: Wide concept, applicable to all sizes of businesses and includes all types of funds.
- Purpose: To start, run, expand, and diversify a business; to increase corporate value.
- Significance:
- Necessary for starting a business (initial capital for assets).
- Helps businesses survive economic downturns.
- Supports growth and expansion.
- Enables timely debt payments.
- Allows businesses to take advantage of new opportunities.
Financial Needs of a Business
The financial needs of a business are divided into two main categories: fixed capital requirements and working capital requirements. Fixed capital is the fund needed to purchase long-term assets like land, buildings, and machinery, that remain invested in the business for a long duration. Working capital refers to the funds required for day-to-day operations of the business, such as buying raw materials, paying bills, and covering other routine expenses. The amount of fixed and working capital needed varies depending on the type and scale of the business, its operating cycle, and other factors like seasonal demand and business expansion.
Short Pointers:
- Fixed Capital Requirements:
- Needed for long-term assets (land, machinery).
- More significant for manufacturing and large-scale businesses.
- Should be financed through long-term financial sources.
- Working Capital Requirements:
- Necessary for daily business operations (raw materials, bills).
- Depends on the operating cycle and sales turnover.
- Generally financed through short-term financial sources.
- Increases with credit sales, slow sales turnover, festive seasons, expansion, or relocation.
- Variability:
- The need for both types of capital varies by business type, size, and other factors.
- Both increase with business growth, technological upgrades, inventory needs, and when settling current debts or relocating.
Classification of Sources of Finance Business funding sources are categorised by period, ownership, and generation. Period divides them into long-term, medium-term, and short-term. Ownership divides them into owned and borrowed funds. Based on the generation source, they are internal or external. Short Pointers: The classification of sources of finance based on the period can be broken down into long-term, medium-term, and short-term sources. Short Pointers: Owner’s and borrowed funds are finance sources. Owners’ funds include profits reinvested in the business. This funding does not need to be repaid during the business’s lifespan and gives owners control. Short Pointers:
Equity, retained earnings, preference shares, debentures, and bank loans are long-term sources. Medium-term sources include bank loans, public deposits, and lease financing; short-term sources include trade credit, factoring, and commercial paper. Equity shares and retained earnings are company-generated funds, while debentures, loans, and public deposits are borrowed. Internal sources are funds generated within the organisation, while external sources are outside.Classification of Sources of Finance Based on Period
Classification of Sources of Finance Based on Ownership
However, banks, financial institutions, debentures, public deposits, and trade credit provide borrowed funds. The business must repay these funds after a certain period with a fixed rate of interest, which can be costly, especially during low earnings or losses. Fixed assets usually secure borrowed funds.Login to see content
NCERT Solutions
NCERT Solutions for Class 11 Business Studies – Chapter 8 Sources of Business Finance
- What is business finance? Why do businesses need funds? Explain.
Answer: Business finance refers to the necessary funds required by a business to carry out its various activities. It is often described as the lifeblood of a business, essential for both the commencement and ongoing operations. Every aspect of business, including planning, organising, managing, and controlling, depends on adequate financial resources. Funds are not only needed to purchase fixed and current assets but also for day-to-day operations such as buying raw materials and paying salaries. Without sufficient finance, a business cannot function effectively as it underpins all core activities and transactions.
Mindmap to remember this answer:
- Definition of Business Finance: Funds needed for business activities, Lifeblood of the business
- Why Funds are Needed: To start the business (initial capital), For ongoing operations: Purchasing assets (fixed and current), Day-to-day expenses (raw materials, salaries)
- Functions Dependent on Finance: Planning and organising, Managing and controlling, Purchasing and selling, Directing and marketing
- Examples of Fund Usage: Buying assets, Daily operational costs
- List sources of raising long-term and short-term finance.
Answer: In our studies, we learn about various means of acquiring the necessary finances for business operations, which can be classified into long-term and short-term sources. Long-term finance, which supports business activities over a longer duration, includes equity shares, retained earnings, preference shares, debentures, and loans from banks and financial institutions. These sources are crucial for acquiring fixed assets and supporting sustainable growth.
On the other hand, short-term finance caters to the immediate operational needs of a business and includes sources like trade credit, factoring, commercial papers, and short-term bank loans. These are essential for managing day-to-day operations like purchasing raw materials or paying wages.
Understanding these sources helps us recognize how businesses balance their needs for immediate functioning and long-term goals, ensuring financial stability and growth.
Mindmap to remember this answer:
- Long-term Finance Sources: Equity Shares, Retained Earnings, Preference Shares, Debentures, Bank Loans
- Short-term Finance Sources: Trade Credit, Factoring, Commercial Papers, Bank Loans (Short-term)
- Purpose: Long-term for growth and assets, Short-term for operational costs
- Key Points: Balance between immediate needs and future goals, Financial stability and growth management
Answer: In business finance, we differentiate between internal and external sources of funds based on their origin. Internal sources are the funds generated within the business itself. Examples include accelerating the collection of receivables, disposing of surplus inventories, and ploughing back profits. These sources are usually cost-effective as they do not require security and can fulfil only limited needs of the business. External sources, on the other hand, involve funds sourced from outside the organisation, like issuing debentures, borrowing from commercial banks and financial institutions, and accepting public deposits. These sources allow businesses to raise larger amounts of money but usually at a higher cost and often require the business to provide security. Understanding these distinctions helps us appreciate how businesses balance their funding strategies to manage costs, security requirements, and funding needs effectively. Mindmap to remember this answer:
Examples: Accelerating receivables, disposing inventories, retained profits
Low cost, No security required, Limited scope
Examples: Debentures, bank loans, public deposits
Higher cost, Requires security, Larger funds available
Cost (Internal lower than External)
Security requirements (None for Internal, required for External)
Funding capacity (Limited for Internal, Large for External)Login to see content
MCQ Questions
Chapter 8 Sources of Business Finance – MCQ Questions
MCQ Questions
- What is considered the ‘lifeblood’ of any business?
| A) Capital | B) Employees |
| C) Finance | D) Management |
Answer: C) Finance
- Which of the following is NOT a fixed capital requirement?
| A) Land and building | B) Plant and machinery |
| C) Inventory | D) Furniture and fixtures |
Answer: C) Inventory
- What is meant by ‘working capital’?
| A) Capital required to set up a business | B) Funds needed for day-to-day operations |
| C) Long-term investments | D) Profits retained for expansion |
Answer: B) Funds needed for day-to-day operations
- Which source of funds is classified as a long-term source based on the period of financing?
| A) Trade credits | B) Commercial paper |
| C) Shares and debentures | D) Bank overdrafts |
Answer: C) Shares and debentures
- Which of the following best describes ‘owner’s funds’?
| A) Funds borrowed from financial institutions | B) Funds raised through issuing shares |
| C) Short-term loans from banks | D) Credits extended by suppliers |
Answer: B) Funds raised through issuing shares
Answer: C) Discounting of bills and collection of debts Answer: C) It does not involve any explicit cost Answer: B) It may lead to overtradingA) Selling products on a commission basis B) Offering insurance for goods transported overseas C) Discounting of bills and collection of debts D) Providing long-term loans to corporations A) It incurs high interest costs B) It dilutes ownership C) It does not involve any explicit cost D) It requires repayment in a short term A) It is only available to large corporations B) It may lead to overtrading C) It cannot be used for purchasing goods D) It must be secured against company assets Login to see content
Very Short Answer Type Questions
Chapter 8 Sources of Business Finance – Very Short Answer Type Questions
- What is business finance?
Answer: Business finance involves obtaining funds to start and operate a company effectively. - Name two types of capital required for a business.
Answer: Fixed capital and working capital. - Define fixed capital requirements.
Answer: Funds needed for long-term investments like machinery and buildings. - What is working capital?
Answer: Funds used for day-to-day business operations.
5.List two sources of long-term financing.
Answer: Equity shares and debentures.
- Describe the difference between owner’s funds and borrowed funds.
Answer: Owner’s funds are investments by owners; borrowed funds are sourced externally with repayment obligations. - What is meant by trade credit?
Answer: It’s credit extended by one trader to another for purchasing goods or services.
Answer: Selling accounts receivables to a factor who collects payments.
Answer: Renting an asset for a specific period instead of purchasing it.
Answer: Funds collected from the public by organisations offering higher interest rates than banks.
Answer: An unsecured short-term debt instrument issued by companies.
Answer: Provides permanent capital with no repayment obligation, enhances borrowing capacity.
Answer: Fixed dividend rates and priority over equity shares in asset liquidation.Login to see content
Short Answer Type Questions
Chapter 8 Sources of Business Finance – Short Answer Type Questions
- What are the primary sources of business finance?
Answer: Primary sources of business finance include equity, retained earnings, debentures, public deposits, and loans from financial institutions. These are essential for meeting various short-term and long-term financial needs of a company.
Mindmap to remember this answer:
- Equity: Shares
- Retained Earnings: Reinvested profits
- Debentures: Bonds
- Public Deposits: Direct from public
- Loans: From banks or financial institutions
- Explain the term ‘business finance’.
Answer: Business finance refers to the funds and credit employed in the business. It includes acquiring and using economic resources for business activities, which are crucial for starting and running a business.
Mindmap to remember this answer:
- Funds: Necessary for operations
- Credit: Financial arrangements
- Uses: Starting and running business
Mindmap to remember this answer: Mindmap to remember this answer:
Answer: The two main types of capital required are fixed capital and working capital. Fixed capital is used for long-term investments like machinery. Working capital is for daily operations like paying wages.
Answer: Financial management is crucial because it ensures efficient and effective management of funds, thereby ensuring financial stability and maximising profitability through strategic planning and monitoring.Login to see content
Case Based Questions
Chapter 8 Sources of Business Finance – Case Based Questions
Case Study 1: Sources of Business Finance
Case:
Neha has started a small manufacturing business. Initially, she used her savings and a small loan from a family friend to set up her business. As her business grew, she realised the need for additional funds to expand her operations. She considered various options like borrowing from a bank, issuing shares, or retaining earnings. However, Neha was unsure about the pros and cons of each option and the best way to raise funds. She consulted her financial advisor, who explained the various sources of business finance available and their advantages and limitations.
Questions:
- What are the different sources of business finance that Neha can consider for raising funds?
Answer:
The different sources of business finance that Neha can consider include:
- Borrowed Funds: This includes bank loans, financial institution loans, debentures, and public deposits.
- Owned Funds: This includes equity shares, retained earnings, and preference shares.
- Explain the advantages and limitations of using retained earnings as a source of finance for Neha’s business expansion.
Answer:
Advantages:
- Retained earnings do not require repayment.
- They do not involve any interest, dividend, or flotation costs, making it cost-effective.
- Using internal funds offers more operational flexibility.
- Retained earnings provide a financial cushion for absorbing unexpected losses.
Limitations:
- Shareholders might be dissatisfied with reduced dividends.
- Retained earnings can fluctuate, making them an uncertain source of funds.
- Opportunity cost may be overlooked, leading to potentially suboptimal investments.
Case Study 2: Classification of Sources of Finance Case: Rahul owns a medium-sized enterprise manufacturing electrical appliances. To upgrade his machinery and expand his production capacity, he needs to raise a significant amount of capital. Rahul is considering various sources of finance and wants to understand how different sources are classified based on the period, ownership, and generation. Questions: Answer: Classification based on the period: Suitable sources for long-term needs: Answer: Classification based on ownership:Login to see content
Value Based Questions
Chapter 8 Sources of Business Finance – Value Based Questions
Value Based Question 1: Sources of Business Finance
Question:
“Business finance is considered the lifeblood of any business operation.” Identify the concept discussed in this statement and explain its significance for new businesses. What value does this highlight about the role of finance in business?
Answer:
The concept discussed in the statement is business finance. Business finance refers to the necessary funding that businesses need to produce and distribute goods and services to meet societal needs. It is crucial for starting, running, expanding, and diversifying a business.
Significance:
- Necessary for Starting a Business: Provides initial capital for assets.
- Surviving Economic Downturns: Helps businesses survive during tough economic times.
- Supporting Growth: Supports growth and expansion of the business.
- Timely Debt Payments: Ensures timely payments of debts.
- Seizing Opportunities: Allows businesses to take advantage of new opportunities.
Value Highlighted: The importance of finance as the foundation of business operations, emphasising its critical role in sustaining and growing a business.
Value Based Question 2: Classification of Sources of Finance Question: “Equity shares represent ownership in a company and entitle the holder to voting rights.” What type of finance is this statement describing, and what are its benefits? Identify the value reflected by giving voting rights to shareholders. Answer: The statement is describing equity shares. Equity shares are a long-term source of finance that provides ownership in a company. Benefits: Value Reflected: The democratic management and transparency in the business operations by involving shareholders in decision-making processes.Login to see content
Long Answer Type Questions
Chapter 8 Sources of Business Finance – Long Answer Type Questions
- Discuss the significance of business finance in the context of starting and running a business. Include an explanation of the term ‘life blood of business’ as it relates to finance.
Answer: Business finance is crucial for both starting and running a business as it is often referred to as the ‘life blood of business’. This term emphasises how integral finance is to maintaining a company’s operations, much like blood is essential for the functioning of a human body. Without sufficient finance, a business cannot start or sustain its operations because it needs funds for everything from acquiring fixed assets like machinery and buildings to covering day-to-day expenses like payroll and utilities.
Mindmap to remember this answer:
Business Finance = Life Blood of Business
- Necessary for:
- Starting a business (buying assets, setting up)
- Running a business (daily expenses, payroll)
- Importance:
- Essential like blood in a body
Maintains and sustains business operations
Mindmap to remember this answer: Answer: Equity shares and preference shares serve as vital tools for corporate financing, each carrying distinct advantages and disadvantages. Equity shares grant shareholders substantial influence in company decisions via voting rights, though dividends are not assured and depend on the company’s profitability, aligning shareholder returns with company success. In contrast, preference shares typically do not confer voting rights, which may restrict shareholder influence in company governance. However, they do provide dividends at a steady rate and assure priority over equity shareholders in asset distribution if the company is liquidated. Therefore, equity shares are preferred by investors willing to accept higher risks for the possibility of higher returns, whereas preference shares are favoured by those seeking consistent returns with less risk. Mindmap to remember this answer: Mindmap to remember this answer: Mindmap to remember this answer: Mindmap to remember this answer:
Answer: The financial needs of a business are broadly categorised into fixed capital and working capital requirements. Fixed capital refers to the funds needed for long-term assets like land and machinery, which remain in the business for a prolonged period. In contrast, working capital is used for day-to-day operations like purchasing raw materials and paying salaries. The choice of funding often depends on the stage of business development, with startups possibly opting for equity to avoid debt burdens and established firms possibly utilising loans for expansion. Examples of fixed capital include purchasing new machinery, while working capital might cover inventory or immediate expenses.
Answer: Retained earnings refer to the portion of profits that a company decides to reinvest in itself rather than distributing as dividends. This source of finance is advantageous because it does not incur direct costs like interest payments and can significantly enhance operational flexibility and the firm’s capacity to absorb financial shocks. However, relying excessively on retained earnings can lead to shareholder dissatisfaction due to reduced dividend payouts and may not always be available if the company is not generating sufficient profit.
Answer: Trade credit is an essential source of short-term finance that allows businesses to purchase supplies without immediate payment. This credit is beneficial under conditions where the business has a good reputation and financial standing, which helps in negotiating better terms with suppliers. However, over-reliance on trade credit can lead to overtrading and increase financial risks, especially if the business faces cash flow problems.
Answer: Commercial papers are unsecured short-term financial instruments that are typically used by corporations to finance their immediate operational needs, such as inventory purchase or meeting short-term liabilities. The merits of commercial papers include their cost-effectiveness and flexibility, offering a simpler and less costly alternative to bank loans. However, since they are unsecured, only financially stable companies with high credit ratings can issue them, limiting their use to the most creditworthy entities.Login to see content
Sample Questions Paper
Chapter 8 Sources of Business Finance – Sample Questions Paper
Sample Question: 1
Time allowed: 2 hours Maximum Marks: 40
General Instructions:
(i) The question paper contains 14 questions.
(ii) All questions are compulsory.
(iii) Section A – Question numbers 1 and 2 are 1 mark source-based questions. Answers should not exceed 10-15 words.
(iv) Section B – Question numbers 3 to 9 are 2 marks questions. These are very short answer type questions. Answers should not exceed 30 words.
(v) Section C – Question numbers 10 to 12 are 4 marks questions. These are short answer type questions. Answers should not exceed 80 words.
(vi) Section D – Question numbers 13 and 14 are 6 marks questions. These are long answer type questions. Answers should not exceed 200 words.
Section A
- What is the maximum period for which commercial paper can be issued?
- Name the source of funds that represents ownership capital.
Section B
- Briefly explain the term ‘ploughing back of profits’.
- What is trade credit? State its one merit.
- Distinguish between owner’s funds and borrowed funds.
- What is informal economy?
- Mention two merits of raising funds through public deposits.
- What is the basic objective behind issuing foreign currency convertible bonds?
- What is the meaning of retained earnings as a source of funds?
Section C
- Explain any four points of significance of business finance.
OR
Differentiate between equity shares and preference shares on any four bases. - What is meant by commercial paper? State any three merits of commercial paper.
OR
Discuss any three merits and any three limitations of debentures as a source of funds. - Why do business organisations require funds for working capital requirements? Explain any three points. OR Explain the following with examples: (i) Civil rights (ii) Political rights
Section D
- How does the form of business organisation and purpose of requiring funds affect the choice of source of funds? Explain with the help of examples.
OR
Why do business organisations resort to lease financing for acquiring assets? Explain any three merits and three limitations of lease financing. - Discuss any three merits and any three limitations of raising funds from commercial banks.
OR
What is meant by Global Depository Receipts (GDRs)? What are the benefits that accrue to the holders of GDRs?
Sample Question: 2
Time allowed: 2 hours Maximum Marks: 40
General Instructions:
(i) The question paper contains 14 questions.
(ii) All questions are compulsory.
(iii) Section A: Question numbers 1 and 2 are 1 mark source-based questions. Answers should not exceed 15 words.
(iv) Section B: Question numbers 3 to 9 are 2 marks questions. Answers should not exceed 30 words.
(v) Section C: Question numbers 10 to 12 are 4 marks questions or short answer type. Answers should not exceed 80 words.
(vi) Section D: Question numbers 13 and 14 are 6 marks questions or long answer type. Answers should not exceed 200 words.
Section A
- What is the meaning of business finance? (1 mark)
- State any one merit of retained earnings as a source of finance. (1 mark)
Section B
- Briefly explain the concept of trade credit. (2 marks)
- What do you understand by commercial paper? (2 marks)
- Distinguish between equity shares and preference shares. (2 marks)
- What are debentures? (2 marks)
- State any two merits of lease financing. (2 marks)
- What are public deposits? (2 marks)
- What is the purpose of credit rating while issuing debentures? (2 marks)
Section C
- Explain any four factors that affect the choice of source of funds for a business organisation. (4 marks)
OR
Discuss the procedure and benefits of raising funds through factoring. (4 marks) - What are the different types of international financing available to business organisations? Explain any two of them. (4 marks)
OR
Differentiate between owners’ funds and borrowed funds as sources of business finance. (4 marks) - What do you understand by Global Depository Receipts (GDRs)? State their features. (4 marks)
OR
What are the limitations of raising funds through issue of debentures? (4 marks)
Section D
- Discuss the various sources of funds that can be categorised on the basis of period. What are their key characteristics? (6 marks)
OR
Explain the merits and limitations of equity shares and preference shares as sources of raising capital for a company. (6 marks) - What are the different bases on which sources of funds for a business can be categorised? Briefly explain each basis with examples. (6 marks)
OR
What are financial institutions? Discuss their merits and limitations as a source of funds for business organisations. (6 marks)