Requirement for additional Funds
A business would require additional capital for two purposes:
1. Financing additional fixed assets, and
2. Financing additional working capital.
This should not be tough to appreciate the need for having adequate fixed facilities along with that to conduct the business. The amount we have invested into the shop, furniture and fixtures here as refer to the illustration of Ramsons, has created the facilities for carrying on the business. This also limits the capacity. We cannot expand our business beyond a specific capacity that is restricted by the facilities created by fixed assets. Whether case of a manufacturing firm, this will be plant ability; in case of a transport undertaking this may be tonnage of trucks, wagons or ships; in case of demonstrate business is and airlines this may be seating capacity rapidly. Any raise in such capacity would needs additional investment.
Hence, investment in fixed assets is needed to expand capacity or to enhance the current operation. Generally, addition to investments is judged on the basis of its capability to decrease the present costs or to raise the present output.
Additional working capital is needed to finance raised holding of inventory, raised credit to customers and raised cash holding requirements. Clearly current creditors would finance part of these requirements. Clearly, current creditors would finance part of such requirement for working capital.
If Ramsons invests in the other shop or in expansion of the existing shop, they will need additional funds for investment in fixed assets as also for raised level o current assets. You will see that whenever additional investment is to be form it non-current assets, we have to use the funds (working capital) available with un-separate arrangement is made for their financing. Similarly, when non-current asset are sold they give funds or result in sources of funds.
We could summaries the general applications of funds given as:
1. Acquisition of new non-current assets as fixed assets
2. Replacement of non-current debt as loans
3. Payment of dividends
4. Raise in the balance of working capital as current assets-current liabilities
If the trading or business operations are not successful, they may utilize funds rather that give funds.