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Small Scale Industries 5
Capital Structure
Finance is the Life Blood of any business. Its management is an
art and calls for special attention. In mostof the organizations,
finance is handled by Chartered ccountants. !he company"s gro#th
depends uponthe proper maintenance of financial accounts. !he
financial function of management is to
$nsure a fair return on in%estment &enerate and build up
surplus and reser%es for gro#th and e'pansion (lan, direct and
control the utilization of finances so as to ensure the ma'imum
efficiency of
operations of operations and build a proper relationship #ith
suppliers, financiers, #or)ers andmembers.
Co*ordinate the operations of the %arious departments through
appropriate measure to ensurediscipline in the use of financial
resources.
!he term capital refers to the total in%estment of money,
tangible assets li)e buildings, etc., and intangible
assets li)e good#ill. It is the total #ealth of a unit or a
company. !he net capital refers to the e'cess oftotal assets o%er
total liabilities.
Capitalisation:Capitalisation is the sum total of all long term
securities issued by a company and the surpluses not meantfor
distribution includes only term loans and retained profits. If a
company raises more capital than isre+uired by the figure of
capitalization or its earning po#er, it is said to be o%er
capitalized, but if itscapital is lo#er than its earning po#er, it
is said to be under capitalized.
$ffects of %er Capitalisation- s a result of o%er capitalization
. !here is considerable reduction in the rate of di%idend on e+uity
shares
/. !he mar)et %alue of shares declines and in%estors lose
confidence in the company0. !he company results to #indo#
dressing1. !here is lo# of good#ill.5. It is indication of reduced
efficiency2. 3esults in a mis*appropriation of the society"s
resources4. Leads to a cut in the #ages of #or)ers #ith a %ie# to
raising profits
. 6a)es it difficult for a company to #ithstand competition7.
Shareholders recei%e lo# di%idends.
8. 9epreciated shares are sub:ect to gambling on stoc) e'change.
Scope for remedial measures or reorganization.
Under Capitalisation company is under capitalized #hen its
capital is lo#er than #arranted by its earning capacity. !he
management should capitalize its earnings by issuing fully paid
up bonus shares. Fle'ibility in financial planning is therefore
+uite essential if the capital structure is to be ad:usted to the
%arying needs of thecompany.
Capital Structure!he capital structure of a company in%ol%es a
decision regarding the ratio of o#nership capital as againstcredit
capital, bet#een short*term and long*term capital and the ratio
among the different sources offinance for capital. !his includes
loans, bonds, share issues and reser%es.
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Capital Structure of a Company Draw out a diagram Page No. 294
from the te t !oo".
!he maintenance of proper ratios bet#een the different types of
securities is )no#n as capital gearing andthe follo#ing factors
generally controls the capital gearing-
. !rading in e+uity/. 3etaining control of a company0. ;ature of
enterprises1. $lasticity of the financial plan5. Legal
re+uirements2. 6ar)et sentiment4. 3e+uirements of in%estors.
!he financial pattern of large scale and medium scale industries
is +uite different from that of small scaleindustries. small scale
industrial unit re+uires funds before it can come into e'istence
and it needs fundsfor e'pansion, modernization and #or)ing capital.
It re+uires long term finance to ac+uire fi'ed assetsli)e land and
building, plant and machinery, etc., and short term #or)ing capital
for the purchase of ra#
materials and stores and for the payment of #ages. !he long term
finance is gi%en by the &o%ernment andde%elopment ban)s and
short term finance is pro%ided by commercial ban)s.
Capital Structure of Small Scale Sector !he capital structure of
small scale industry is +uite simple. large number of industries
commence
production #ithout any capital. $%en #hen there is re+uirement
of capital, the same are contributed by theentrepreneur or by money
borro#ed from relati%es and friends and sho#n as capital. nly in
case of
bigger units among #ith small scale sector capital is raised
from the public.
#i ed and wor"ing capital needs of small scale industrial units
-
!he credit facilities for small case industries may be re+uired
for 6eeting the e'penses incurred on installation of plant and
machinery, ac+uisition of land building,
maintenance of machinery against depreciation, reno%ation,
modernization and e'pansion (urchase and stoc)ing of ra# materials,
in%entories of goods, and goods in the process of
manufacture. Fi'ed capital needs may be met by medium and long
term loans #hile #or)ing capital
re+uirement may be met by short term ad%ances.
$imitations of %stimating the &otal 'n(estment
)e*uirements+!here are many limitations arise in the estimation of
fi'ed and #or)ing capital re+uirements of smallscale units. It is
difficult to differentiate bet#een small scale industries, %illage
and cottage industries andsmall borro#ers, etc. ll small units are
not registered #ith the State 9irectors of Industries. 6any
smallunits do not maintain proper boo)s of accounts. s a result it
is difficult to estimate the credit re+uirementfor fi'ed and
#or)ing capital for small scale industries.
Conclusion+Capital is the )ey input in small scale industries.
Capital structure of small scale industries %ary #ith thesize of
business, character of business, gro#th, ape
