Uses (application) of funds - Education - EzineMark

A business would require additional capital for two purposes;

• Financing additional fixed assets;
• Financing additional working capital

It should not be difficult to appreciate the necessity for having adequate fixed facilities with which do conduct the business. The amount invested in the land, buildings, shops, furniture and fixtures create the facilities for carrying on the business. It also limits the capacity. The business cannot be expanded beyond a certain capacity which is limited by the facilities created by the fixed assets. In the case of manufacturing firms, it will be represented by the plant capacity and in the case of transport undertaking it is represented by the tonnage of trucks, ships or wagons and in the case of show business and airlines it may be the seating capacity and so on. Any increase in such capacity would require additional investment.

Thus, investment in fixed assets is required to expand the capacity or to improve the current operation.

Usually addition to investments is judged on the basis of the ability to reduce the present costs or to increase the present output.

Additional working capital is required to finance increased holding of inventory, increased credit to customers and increased cash holding requirements. Obviously, current creditors would finance part of this requirement for working capital.

Additional working capital is required for the purpose of financing increasing holding of inventory, increased credit to customers and increased cost holding requirements. Obviously, current creditors would finance part of this requirement for working capital purposes.

In the case of existing units, when the investment is made in another shop or in expansion of the existing shop, they will require additional funds for investment in fixed assets as also for increased level of current assets.

It can be noticed that whenever additional investment is to be made in noncurrent assets, the funds available in hand (working capital) has to be used unless separate arrangement is made for their financing. Likewise, when noncurrent assets are sold, they should provide funds or result in sources of funds.

The usual applications of funds can be summarized as mentioned below:

1. Acquisition of new noncurrent assets ? fixed assets;
2. Repayment of non current debt(loans)
3. Payment of dividends
4. Increase in the balance of working capital (current assets ? current liabilities)

In case the trading or business operations are unsuccessful, they may use funds rather than provide funds. The uses of funds, as they are usually presented in the fund flow statements are as mentioned below:

• Dividends
• Non operating losses not passed through profit and loss account;
• Redemption of redeemable preference share capital;
• Repayment of debentures/bonds;
• Repayment of long term loans;
• Purchase of fixed assets;
• Purchase of long term investments;
• Increase in working capital.

Source: http://education.ezinemark.com/uses-application-of-funds-18d5d294986.html

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