(a) Contemplate the list of features given below and IDENTIFY each one of them with the most relevant sources of funds: (i) It is the most expensive…

(a) The most relevant sources of funds: Feature Sources of Fund (i) It is the most expensive source of funds. Equity (ii) It entails a high degree of risk since they have to be repaid as per the terms of agreement. Debentures (iii) It supports businesses in their routine activities. Funding from Banks (iv) Business enterprise has options to raise capital from International markets also. International Funding (v) This source of finance sometimes is the last option for startups which doesn't qualify for bank funding Angel Financing (b) Trade credit and bank overdraft are two commonly used short-term financing sources but each has distinct features which are shown below: S. No. Trade credit Bank overdraft 1. Trade credit is the credit extended by suppliers, allowing the firm to delay payment for goods or services. Under this facility, customers are allowed to withdraw in excess of credit balance standing in their Current Account. 2. The usual duration of such credit is 15 to 90 days. Though overdrafts are repayable on demand, they generally continue for long periods by annual renewals of the limits. 3. Trade credit is a type of interest free loan, therefore failure to avail this facility has an interest cost. Interest is charged on daily balances 4. It generates automatically in the course of business and is common to almost all business operations. Borrower need to apply to bank for Bank overdraft facility and are operated in the same way as cash credit and current accounts. 5. It enhances automatically with the increase in the volume of business and fast payment. A fixed limit is, therefore, granted to the borrower within which the borrower is allowed to overdraw his account. (c) The trade-off between the components of working capital can be summarised as follows: Component of Working Capital Advantages of higher side (Profitability) Trade-off (between Profitability and Liquidity) Advantages of lower side (Liquidity) Inventory Fewer stock-outs increase the profitability. Use techniques like EOQ, JIT etc. to carry optimum level of inventory. Lower inventory requires less capital but endangered stock-out and loss of goodwill. Receivables Higher Credit period attract customers and increase revenue (but can result in more bad debts) Evaluate the credit policy; and use services of debt management (factoring) agencies. Cash sales provide liquidity but fails to boost sales and revenue (due to lower credit period) Pre-payment of expenses Reduces uncertainty and profitable in inflationary environment. Cost-benefit analysis required Improves or maintains liquidity. Cash and Cash equivalents Payables are honoured in time, improves the goodwill and helpful in getting future discounts. Cash budgets and other cash management techniques can be used Cash can be invested in some other investment avenues Payables and Expenses Capital can be used in some other investment avenues Evaluate the credit policy and related cost. Payables are honoured in time, improves the goodwill and helpful in getting future discounts.