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General Business Articles

What is Over Capitalization?

Concept of Over Capitalization

The phrase ‘Over Capitalization’ should not be confused with excess of capital. Truly speaking, over capitalization is a relative term used to denote that the firm in question is not earning reasonable income on its funds.

According to Bonneville, Dewey and Kelly, when a business is unable to earn a fair rate of return on its outstanding securities, it is over capitalized. Thus over capitalization refers to that state of affairs where earning of the corporation do not justify the amount of capital invested in the business. The main symptom of over capitalization in a company is the amount of earning which it is making on its total capital.… Read the rest

Abey Francis

Fixed Capital of Capital Requirements

The fixed capital of an industrial concern is invested in fixed assets like plant and machinery, land, buildings furniture, etc. These assets are not fixed in value; in fact, their value may record an increase of decrease in course of time.

They are fixed in the sense that without them, the business of the concern cannot be carried on. This means that the fixed capital is used for meeting the permanent or long-term needs of the concern. While making an assessment of the fixed capital requirements, a list of the fixed assets needed by the concern will have to be prepared, say, by promoter.… Read the rest

Abey Francis

Financial Sector Reforms in India

In India, a decade old on-going financial reforms have transformed the operating environment of the finance sector from an administrative regime to a competitive market base system.  Since mid-1991, a number of reforms have been introduced in the financial sector in India.  Rangarajan once noted that domestic financial liberalization has brought about the deregulation of interest rates, dismantling of directed credit, reforming the banking system, improving the functioning of the capital market, including the government securities market.  The main emphasis on the financial sector reform has been on the banking system so as to improve the performance of public sector banks.… Read the rest

Abey Francis

Working Capital – Definition and Factors Affecting Working Capital

Working capital is the amount of money that a company has tied up in funding its day-to-day operations. A company has to tie up money to fund its stocks, credit sales and other current assets, but this is offset by its ability to fund this from current liabilities liabilities such as purchases on credit.

In the Annual Survey of Industries (1961), working capital is defined to include “Stocks of materials, fuels, semi-finished goods including work-in-progress and finished goods and by-products; cash in hand and bank and the algebraic sum of sundry creditors as represented by (a) outstanding factory payments e.g. rent, wages, interest and dividend; b) purchase of goods and services; c) short-term loans and advances and sundry debtors comprising amounts due to the factory on account of sale of goods and services and advances towards tax payments”.

… Read the rest
Abey Francis

Capital Gearing and It’s Significance

Definition of Capital Gearing

The most important factor which must be taken into account by the promoters while drafting the financial plan of a company is capital gearing.

Gearing means the ration of different types of securities to total capitalization. The term, when applied to the capital of a company, means the ratio of equity share capital to the total capital and is known as capital gear ratio or capital gearing.

J. Batty defines the term ‘capital gearing’ as  “The relation of ordinary shares (equity shares) to preference share capital and loan capital is described as the capital gearing.”

… Read the rest
Abey Francis

Methods of Raising Finance for Business

The methods of financing should be adjusted to the stage or phase of the trade cycle. The total capital shall be raised by different means, or what is sometimes called “geared”, according to the phase of the cycle.

Different types of securities may be issued in certain proportions, an what ratio will each type bear to the total capital will depend upon the particular phase. For example, in the beginning of an optimistic expansion, debentures may be offered to good advantage. At a later time, when speculative enthusiasm is strong, shares will yield better returns. During depression short time borrowing can be resorted to, if the credit of the company is good.… Read the rest

Abey Francis
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