Question

Anupama has been successfully running a soft skills training company for the past five years in Bangalore. Her company has become popular and enjoys a good reputation in the city. She now plans to start a chain of soft skills training centres and has identified four strategic places for the same in the city. Till now she has been managing all the financial requirements of her business through the profits made in her business. However, in order to implement her expansion plans funds will have to be raised externally. Recently, she procured a big export order. Although the importer has promised to make some advance payments, Anupama would still need more funds to meet the increased working capital requirements.

In context of the above case:

1. ‘Till now she has been managing all the financial requirements of her business through the profits made in business.’ Name the source of the funds being mentioned in the statement and state it's any two merits. (3)
2. Suggest any two long-term sources of funds from external sources that Anupama can use to finance her expansion plans. (1)
3. Suggest any two sources through which Anupama can raise funds to meet the increased working capital requirements of her business. (2)
4. Give any two merits for each of the suggested source of funds. (2)

Answer 1

1. Source of Funds and its Merits:
   • The source of funds Anupama has been using is Retained Earnings/Ploughing Back of Profits.
   • Two Merits of Retained Earnings:
     1. Cost-Effective: No interest or dividend is payable, so it is a low-cost source of finance.
     2. No Dilution of Control: Retained earnings do not affect the ownership or voting rights of the business.
2. Anupama can consider the following long-term external sources: 
   1. Equity Shares
   2. Debentures
3. For short-term working capital needs, Anupama can consider: 
   1. Trade Credit
   2. Bank Loan/Overdraft
4. Two Merits of Each Suggested Source for Working Capital:
   1. Trade Credit: 
      1. No immediate cash outflow required 
      2. Easily available from suppliers based on reputation
   2. Bank Loan/Overdraft:
      1. Flexible and quick source of finance
      2. Helps manage day-to-day cash flow requirements