Finance is the life-blood of business. The business cannot run efficiently if it does not have adequate finance to meet its requirements. The financial requirements of business can be classified into two categories:
I. Short-term financial requirements, and
II. Long-tem financial requirements.
Short-term funds are required for meeting working capital needs. They are usually required for a period up to one year. They are raised from sources which can provide funds only for a short period quickly and at reasonable cost. The requirement of these funds is usually met by taking short-term loans or getting the bill discounted from the commercial banks.
For example raw materials must be purchased at regular intervals, there are some expenses which have to be paid during the process such as wages to workers, power and water charges etc. Thus there is a continuous necessity of liquid cash for meeting those expenses. For such, short term funds are needed. So availability of short – term funds are very essential in day today business.Inadequacy of short- term funds may even lead to closure of business.
PURPOSES OF SHORT-TERM FINANCE
• It facilitates the smooth running of business operations by meeting day to day financial requirements.
• It enables firms to hold stock of raw materials and finished product.
• With the availability of short-term finance goods can be sold on credit. Sales are for a certain period and collection of money from debtors takes time. During this time gap, production continues and money will be needed to finance various operations of the business.
• Short-term finance becomes more essential when it is necessary to increase the volume of production at a short notice.
• Short-term funds are also required to allow flow of cash during the operating cycle. Operating cycle refers to the time gap between commencement of production and realisation of sales.
Sources of Short-term...