corporate sector of pakistan

8/8/2019 Corporate Sector of Pakistan

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companies

Welfareorganisations andassociations

357Leasingcompanies

30

Trade companieslimited by guarantee 83

Asset

managementcompanies

4

Unlimited companies6Open-end mutualfunds

3

Credit ratingcompanies

2

Corporate social responsibility or CSR as it is fondly called is a relatively newerconcept in Pakistani corporate sector. The international market is adopting newer andinnovative ways to show that they care for the humanity. Pakistani CSR scene leavesmuch to be desired.

Types of Financial Resources AvailableTypes of Financial Resources available particularly to companies in this sector

are:

Debt &

Equity

1) Debt Financing

Business owners may have some trepidation about borrowing from afinancial institution, as it means relinquishing some cash profits. But it could be agood option so long as you expect to have sufficient cash flow to pay back theloans, plus interest. The major benefit for debt financing, unlike with equityfinancing, you'll retain full ownership of your business. The interest on businessloans is also tax-deductible, and youll build your credit.

Small businesses frequently take bank loans. They are usually easy toobtain so long as you have good credit, enough equity to cover the paymentsand you're not already carrying heavy debts. These loans are generally grantedeither on a short-term basis of less than one year or long-term basis of more thanone year.

Commercial finance companies also lend money and are willing to fundriskier ventures that don't have solid financials. But this type of funding usuallycomes with high interest.

2) Equity Financing

Small business owners when weighing debt and equity financing optionsoften opt for equity financing because they have concerns about either qualifyingfor a loan or having to channel too much of their profits into repaying the loan.Investors and partners can provide equity financing, and they generally expect to profit from their investments. No debt payments mean more cash on hand.


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Moreover, if no profit materializes, you arent obligated to pay back equitycontributions.

Drawback of Equity Finance:

The major drawback of equity financing is that you are no longer the full

owner of a business once you have other financial contributors who expect ashare. As such, you will be relinquishing not just financial control, but will nolonger be the sole arbiter of the businesss creative and strategic direction.There are also so-called angel investors: wealthy individuals or networks that arewilling to fund small businesses. Angels are the largest source of seed and start-upcapital for businesses, investing $25.6 billion in businesses in 2006, according tothe Center for Venture Research at the University of New Hampshire. Angelinvestors tend to fund small businesses for longer periods of time and expect alower return on investment than do venture capital firms.Venture capital firms, on the other hand, provide equity for businesses and expecthigh returns on their investments within three to five years. They generally fund

companies with significant growth potential -- Microsoft and Google attracted VCfunding -- not small businesses.

Sources of Finance according to Nature:In the present days there exist several sources of finance. Keeping in view the

type of requirement the finance sources are chosen. Find below various types offinance source:

1) Long-term Sources of finance

Long-term sources of finances can be raised from the following sources:

Share capital or Equity Share.

Preference shares. Retained earnings.

Debentures/Bonds of different types.

Loans from financial institutions.

Loan from State Financial Corporation.

Loans from commercial banks.

Venture capital funding.

Asset securitization.

International

2) Medium-term Sources of financeMedium-term sources of finance can be raised from the following sources.

Preference shares.

Debentures/Bonds.

Public deposits/fixed deposits for duration of three years.

Commercial banks.

Financial institutions.

State financial corporations.


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Lease financing / Hire Purchase financing.

External commercial borrowings.

Euro-issues.

Foreign Currency bonds.

3) Short term Sources of finance Trade credit.

Commercial banks.

Fixed deposits for a period of 1 year or less.

Advances received from customers.

Various short-term provisions.

Internal And external Sources of finance:

Internal Sources

Traditionally, the major sources of finance for a limited company were internal sources:

Personal savings

Retained profit

Working capital

Sale of assets

External Sources

OwnershipCapitalIn this context, 'owners' refers to those people/institutions who are shareholders.

Sole traders and partnerships do not have shareholders - the individual or the partnersare the owners of the business but do not hold shares. Shares are units of investment ina limited company, whether it is a public or private limited company. Shares aregenerally broken down into two categories:

Ordinary shares

Preference shares

Non-Ownership CapitalWhilst the following sources of finance are important, they are not classed asOwnership Capital - Debenture holders are not shareholders, nor are banks who lendmoney or creditors. Only shareholders are owners of the company.

Debentures

Other loans
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Overdraft facilities

Hire purchase

Lines of credit from creditors

Financial structures of four well known British companies

Grants

Venture capital

Factoring and invoice discounting:

Leasing

Personal Savings

Quite simply, personal savings are amounts of money that a business person, partner orshareholder has at their disposal to do with as they wish. If that person uses theirsavings to invest in their own or another business, then the source of finance comesunder the heading of personal savings.

Although we would generally discuss personal savings as a source of finance for smallbusinesses, there are many examples where business people have used substantial sumsof their own money to help to finance their businesses

Retained Profit

This is often a very difficult idea to understand but, in reality, it is very simple. When abusiness makes a profit and it does not spend it, it keeps it - and accountants call profitsthat are kept and not spent retained profits. That's all.

The retained profit is then available to use within the business to help with buying newmachinery, vehicles, computers and so on or developing the business in any other way.Retained profits are also kept if the owners think that they may have difficulties in thefuture so they save them for a rainy day!

Working Capital

This is the short-term capital or finance that a business keeps. Working capital is themoney used to pay for the everyday trading activities carried out by the business -stationery needs, staff salaries and wages, rent, energy bills, payments for supplies andso on. Working capital is defined as:

Working capital = current assets - current liabilities

Where:
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current assets are short term sources of finance such as stocks, debtors and cash - theamount of cash and cash equivalents - the business has at any one time. Cash is cash inhand and deposits payable on demand (e.g. current accounts). Cash equivalents are shortterm and highly liquid investments which are easily and immediately convertible intocash.

current liabilities are short term requirements for cash including trade creditors,expense creditors, tax owing, dividends owing - the amount of money the business owesto other people/groups/businesses at any one time that needs to be repaid within the nextmonth or so.

Sale of Assets

Business balance sheets usually have several fixed assets on them. A fixed asset isanything that is not used up in the production of the good or service concerned - land,buildings, fixtures and fittings, machinery, vehicles and so on. At times, one or more ofthese fixed assets may be surplus to requirements and can be sold.

Alternatively, a business may desperately need to find some cash so it decides to stopoffering certain products or services and because of that can sell some of its fixed assets.Hence, by selling fixed assets, business can use them as a source of finance. Selling itsfixed assets, therefore, has an effect on the potential capacity of the business - theamount it can produce.

Other sources:

Other sources of finance include

Leasing

Leasing is like renting a piece of equipment or machinery. The business pays a regularamount for a period of time, but the item belongs to the leasing company.

Most company cars are leased to businesses. The business pays a monthly fee for the carand at the end of the period (normally about two years), the business swaps the car for anewer model.

The advantages of leasing are:

Cheaper in the short run than buying a piece of equipment outright.

If technology is changing quickly or equipment wears out quickly it can be regularly updated orreplaced.

Cash flow management easier because of regular payments.


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The disadvantages of leasing are:

More expensive in the long run, because the leasing company charges fees which make the totalcost greater than the original cost.

Hire Purchase

Business hires the equipment for a period of time making fixed regular payments. Oncepayments have finished it then owns the piece of equipment. Hire purchase is different toleasing in that the business owns the equipment when it has finished making payments.With an equipment lease, the equipment is handed back to the leasing provider.

Debt Factoring

A business sells its outstanding customer accounts (those who have not paid their debts tothe business) to a debt factoring company.

The factoring company pays the business - say 80-90% of face value of the debts - andthen collects the full amount of the debts. Once it has done this it will pay the remainingamount to the business less a charge.

It is a good way of raising cash quickly, without the hassle of chasing payments. BUT itis not so good for profits since it reduces the total revenue received from those sales.

Government Finance

The government and the European Union provide help to businesses for the followingreasons:

Protect jobs in failing/declining industries.

Help create jobs in areas of high unemployment.

Help start up new businesses.

Help businesses relocate to areas of high unemployment.

Some of the main sources of funds are:

European Structural Fund

Assisted Areas


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Regional Selective Assistance

Small Loans Guarantee Scheme

Trade Credit

A business does not always have to pay their bills as soon as they receive them. They aregiven period of credit, normally around 30-60 days. By trying to extend this period theycan improve their short-term finance position.

Small businesses now have some protection under law that prevents larger firmsexploiting their credit terms.

Trade credit is an important source of finance for nearly all businesses since it iseffectively a free source of finance.

Retained Profits

The cheapest form of finance is the business own profits. In the UK over 80% ofretained profits are reinvested back into the business. Since it is not being borrowed fromanyone, it does not cost money to use.

Own Capital

For sole traders and partnerships a common source of finance, especially for start up ismoney from the individuals who are forming the business. They may also borrow moneyfrom family and friends. Own capital is a costless form of finance, but carries the risk ofthe money being lost.

Working Capital

Working capital is the amount of money available for the day to day running of thebusiness. It is the difference between current assets and current liabilities. See below formore details of how working capital can be used.

Sources of Finance for Public Sector Organizations

Public sector organizations receive from both the normal sources that most businessesreceive money, but also from tax revenues. Most public sector organizations, such asschools and hospitals obtain more straight from the government - who have previouslycollected the money from tax payers.


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Other organizations gain money from sales, e.g. stamps for the Post Office, and licensesfor the BBC.

Guidelines & Choice between Debt and Equity for MeetingFinancial Requirements;

The management decision regarding choice between debt and equity modes offinance is contingent on a number of factors which include risk and cost ofcapital. Under a private enterprise system the prospects of individual gains areinevitably associated with the possibilities of loss, and this hazard rests on thosewho have supplied the capital. The hazard shows itself in the form of uncertaintyboth of income to be received and recovery of principal invested. It is theseuncertainties that constitute risk.

If a corporate entity fails to earn a profit and continues to spend more money thanit takes in, a time will come when it will be unable to meet its current obligations.

When that happens the company becomes insolvent or bankrupt. In suchsituations all debts must be settled in full before any equity claims can be paid.

Because of the priority of debt claims before equity claims the creditor is ready tosupply long term capital in the form of debt at a lower cost in the form of interest.The creditor, therefore, does not demand a proportionate share in profit. It may bepointed out here that the position of a creditor is negotiated one as a result of abargain between the firm and the supplier of the funds. The decision of acceptinga particular level of risk, there fore is voluntary on both the sides.

If we compare debt and equity securities from the point of view of allocation ofincome, holders of debt securities have to be satisfied with low and fixed

incomes. These instruments also enjoy stable market values because of lowerrisks. on the other hand there is lot of variation in the income of equity securitywith the result that the price performance is more volatile resulting in the higherdegree of risk. In accepting this higher level of risk, equity holder on the averageexpect a higher rate of return.

The mix of debt and equity, that is, the capital structure differs from industry toindustry. Industries with stable sales performance and stable margins (sellingprice-cost relationship) permit use of more debt. On the other hand, an industryhaving less stable sales performance and volatile margins may have a lower debtto equity ratio.

Therefore, companies in stable sales industries will enjoy lower cost of capital

compared with companies in volatile sale performance industries. Also the capitalstructure affects the stock market performance of the shares of company. Acompany using more debt than the industry averages may have lower share pricebecause of higher risk. Use of more debt may result in higher earnings per sharebut they may be offset by increased risk, resulting in an adverse price effect .

The mode of financing used is also influenced by the motivation to keep control.A firm may avoid issuing new equity for fear of dilution of control and, therefore,the growth requirements may be financed through internal equity (retained


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profits ) only. Debit may also be used when this source falls short of therequirement. This could result in a firm moving away from the optimal debt toequity ratio.

Conclusion:

Pakistan is a developing country and its economy is going to a depression. Most of theorganisations are not certain about the government also, but a lot of opportunities areavailable for them.

The above data suggests that debt and equity have got certain advantages as well asdisadvantages, but debt has got more advantages in Pakistan, so debt is more suitableoption in that part of the world. It is easy to get credit and also tax benefit is also there.But the bankruptcy cost is also there, so a mix of debt and equity is required to increasethe market share.

Reference:[1] http://en.wikipedia.org/wiki/Pakistan_Inc[2]http://www.dailytimes.com.pk/default.asp?page=2008\08\19\story_19-8-2008_pg11_7[3]http://telecompk.net/2007/07/09/corporate-social-responsibility-in-pakistan-telecom-sector/[4] http://www.ise.com.pk/ise%20website/investor%20education/HTML/research%20paper%20links/html/rpaper_2.html
http://en.wikipedia.org/wiki/Pakistan_Inchttp://en.wikipedia.org/wiki/Pakistan_Inchttp://www.ise.com.pk/ise%20website/investor%20education/HTML/research%20paper%20links/html/rpaper_2.htmlhttp://www.ise.com.pk/ise%20website/investor%20education/HTML/research%20paper%20links/html/rpaper_2.htmlhttp://www.ise.com.pk/ise%20website/investor%20education/HTML/research%20paper%20links/html/rpaper_2.htmlhttp://en.wikipedia.org/wiki/Pakistan_Inchttp://www.ise.com.pk/ise%20website/investor%20education/HTML/research%20paper%20links/html/rpaper_2.htmlhttp://www.ise.com.pk/ise%20website/investor%20education/HTML/research%20paper%20links/html/rpaper_2.html

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