* Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc
* Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is other wise known as revolving or circulating capital
Cash in hand / at bank
Short term loans
Bank Over draft
One of the most important areas of finance to monitor is your company’s working capital, which is the difference between current assets and current liabilities. As a small business owner, you must constantly be alert to changes in working capital and their implications; otherwise, you may miss some warning signs that can lead to business failure. The most important component of working capital is cash, far the most important asset of any business, particularly a small business. Without it, the business will fail. So it is of paramount importance for you as the business owner to control all cash transactions.
1. Cash and equivalents. This most liquid form of working capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will peak cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it?
2. Accounts receivable. Many businesses extend credit to their customers. If you do, is the amount of accounts receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them?
3. Inventory. Inventory is often as much as 50 percent of a firm’s current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What’s the rate of inventory turnover compared with other companies in your type of business?
4. Accounts payable. Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm’s payment policy doing to enhance or detract from your credit rating?
5. Accrued expenses and taxes payable. These are obligations of your company at any given time and represent a future outflow of cash.