Explain various sources of finance in financial management.

Finance is the major part in running a firm. Distribution of finance to each and every department is based upon the requirements of that department and the situation of the business. Requirement of finance can be broadly classified into following −

  • Long term or fixed capital financial requirement.
  • Short-term or working capital requirement.

Sources of finance shows the mobilization of funds for their requirement. To meet their long term and short term requirements firm needs amounts to meet their requirements. Based on mobilization of funds various sources are classified as below

Based on the period

  • Long term finance
  • Short term finance

Based on ownership

  • An ownership source of finance.
  • Borrowed capital.

Based on sources of generation

  • Internal source of finance.
  • External source of finance.

Based on mode of finance

  • Security finance.
  • Retained earnings.
  • Loan finance.

There is another category, where the above sources of funds are categorised into three types as mentioned below −

  • Security finance − It is a certificate/instrument, which has monetary value and can be traded. It is classified into debt securities, equity securities and derivatives.

  • Internal finance  − Retained earnings, sale of asset and reduction in working capital.

  • Loans finance.