No business can be started without money. You need an initial amount of money in order to invest into the business and to make sure that it runs. It is a difficult task to raise this huge capital to start the venture. Some borrow funds from the banks. Some add money from their own pockets. However, the most common way of raising funds is with shares.
When a company is started and the founder needs funds to gather the initial capital, they divide the capital into several segments called shares. These shares are usually open to the public to purchase. Every share is valued at a particular price and an individual can buy as many shares as they want to. This is how businessmen raise their capital and increase the scale of their business. Once people buy the shares, they become part owners of the company. They have a say in the functioning of the company and are also entitled to the profits according to the number of shares they purchased.
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Just like us regular Joes’, joint stock companies also keep aside a portion of their savings to cater for their future. There are provisions such as the General Reserve, Debenture Redemption Reserve, Dividend Equalisation Reserve and many more. These reserves serve as an important source for the long-term finance you need to run your business.
Every time the company makes a profit, it is distributed in the decided ratio among the shareholders and the debenture-holders. The amount of profit that is left after being distributed is transferred into these reserves, which form a part of the retained earnings. Most of the time, this amount may also be used to buy fixed assets. Right from the time when you establish your company to the time you reach saturation, you are constantly in need of funds. You need money for every single task you perform in the organisation – be it paying the workers, incurring advertising costs, operating machines or paying the rent and bills.
It is manageable if you require a smaller initial capital for your company. However, it is difficult to arrange money quickly if you need it for large scale purposes. You may need money to invest in a fixed asset. You may need money to increase your capital. You may need money to revamp your business and start fresh. In all these cases, the best source of long-term finance is borrowing funds. The most common means of borrowing for a company are the commercial banks. |
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