This page contains the entrepreneurship class 11 cbse book chapter/unit Resource Mobilization: Estimating Financial Requirement notes where in the questions/answers/solutions for this chapter/unit 7.2 are covered.
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Q.1. Answer in not more than 15 words:
Question Q.1.(i)
Q.1.(i) Define ‘Capitalisation’.
Answer Q.1.(i)
Capitalisation is the total amount of long-term funds received from shareholders and creditors.
Question Q.1.(ii)
Q.1.(ii) Define the term “Business Finance”.
Answer Q.1.(ii)
Business finance means the acquisition and utilization of capital funds for business needs and objectives.
Question Q.1.(iii)
Q.1.(iii) What is meant by ‘Capital Structure’?
Answer Q.1.(iii)
Capital structure means the proportion between owned funds and borrowed funds in business.
Question Q.1.(iv)
Q.1.(iv) Name the plan that shows the inflows and utilization of funds.
Answer Q.1.(iv)
The plan is called Financial Planning.
Q.2. Answer in not more than 50 words:
Question Q.2.(i)
Q.2.(i) Why is finance required for business?
Answer Q.2.(i)
Finance is required for commencement, day-to-day operation, modernization, expansion, diversification, and research activities. Finance can also be called as the life blood of enterprise because business depends on timely procurement and proper use of funds.
Question Q.2.(ii)
Q.2.(ii) Enlist the major areas of financial decision-making by the entrepreneur.
Answer Q.2.(ii)
The two major areas of financial decision-making are:
1.
Funds requirement decision
2.
Financing decision
The first relates to estimating total funds needed, and the second relates to the sources from which funds will be raised.
Question Q.2.(iii)
Q.2.(iii) The nature of business affects the requirement of fixed capital. Give two examples to support this observations.
Answer Q.2.(iii)
A manufacturing business needs more fixed capital because it requires plant and machinery. A trading business usually needs less fixed capital because it does not require heavy machinery. Thus, the nature of business directly affects fixed capital requirement.
Q.3. Answer in not more than 75 words:
Question Q.3.(i)
Q.3.(i) How is “Capitalisation” different from “Capital Structure”?
Answer Q.3.(i)
Capitalisation means the total amount of long-term funds received from shareholders and creditors by the business. In contrast,capital structure means the proportion or ratio between owned funds and borrowed funds in that total capital. So, capitalisation tells us the total long-term capital, while capital structure tells us the composition of that capital.
Q.4. Answer in not more than 150 words:
Question Q.4.(i)
Q.4.(i) What are the objectives of financial planning?
Answer Q.4.(i)
The objectives of financial planning are to ensure that enough funds are available at the right time and in the right amount for the business. It helps in proper estimation of financial needs, balanced capital structure, avoiding shortage or excess of funds, and proper utilization of available money. Financial planning also helps the entrepreneur achieve business goals smoothly and in an economical way.
Question Q.4.(ii)
Q.4.(ii) Differentiate between the Fixed Capital Requirement and Working Capital Requirement on the following basis:
(a)
Meaning and scope
(b)
Nature
(c)
Duration
(d)
Sources of procurement used.
Answer Q.4.(ii)
Basis
Fixed Capital Requirement
Working Capital Requirement
(a) Meaning and scope
Funds needed for fixed assets like land, building, plant, machinery.
Funds needed for day-to-day operations of business.
(b) Nature
Long-term in nature.
Short-term and recurring in nature.
(c) Duration
Required for a long period.
Required for daily/regular operations.
(d) Sources used
Equity shares, debentures, long-term loans.
Trade credit, bank overdraft, cash credit, short-term loans.
Question Q.4.(iii)
Q.4.(iii) State whether the following require small or large working capital. Answer should be supported by a valid reason:
(a)
selling ice-creams
(b)
following a liberal credit policy
(c)
dealing in stainless steel wares
(d)
using capital intensive technology.
Answer Q.4.(iii)
(a)
Selling ice-creams–Small working capital, because goods sell quickly and cash returns fast.
(b)
Following a liberal credit policy–Large working capital, because money remains blocked in debtors for longer time.
(c)
Dealing in stainless steel wares–Large working capital, because higher stock value is involved.
(d)
Using capital intensive technology–Small working capital, because more investment is in fixed assets and less in current operations.
Q.5. Answer in not more than 250 words:
Question Q.5.(i)
Q.5.(i) Discuss the factors that determine the amount of working capital required by an enterprise.
Answer Q.5.(i)
Working capital means the funds needed for the day-to-day operations of a business. The amount of working capital required by an enterprise depends on several factors.
The important factors are:
1.
Nature of business– Trading and service firms usually need less working capital than manufacturing concerns.
2.
Size of business– A large business needs more working capital than a small business.
3.
Length of production cycle– If production takes more time, more funds remain blocked, so working capital requirement rises.
4.
Turnover rate– Faster turnover reduces working capital need, while slower turnover increases it.
5.
Seasonal fluctuations– Seasonal businesses require more working capital in peak season.
6.
Credit policy– Liberal credit policy increases working capital requirement.
7.
Capital intensive technology– Greater use of capital intensive technology may reduce working capital needs.
Thus, working capital requirement is not same for every business; it varies according to the type and conditions of the enterprise.
Question Q.5.(ii)
Q.5.(ii) Explain the term ‘Fixed Capital Requirement’. Discuss the factors to be kept in mind while planning for fixed capital.
Answer Q.5.(ii)
Fixed capital requirement means the funds required for acquiring fixed assets such as land, building, plant, machinery, furniture, and equipment. These assets are needed for a long period and help in carrying on business operations.
While planning for fixed capital, the entrepreneur should keep in mind the following factors:
1.
Nature of business– Manufacturing businesses need more fixed capital than trading concerns.
2.
Scale of operations– Large-scale enterprises require more land, machinery, and infrastructure.
3.
Choice of technique– Capital intensive technology increases fixed capital requirement.
4.
Method of acquisition– If assets are taken on lease or rent, fixed capital requirement may be less.
5.
Future expansion plans– If expansion is expected, more fixed capital planning is needed.
6.
Diversification plans– New product lines or activities may also require extra fixed assets.
So, fixed capital planning should be done carefully because these assets involve large investment and affect the long-term working of the enterprise.
Question Q.5.(iii)
Q.5.(iii) ‘An ideal capital structure is the result of great, planning and team work’. What factors are required to be planned and paid attention at this time.
Answer Q.5.(iii)
An ideal capital structure means a proper balance between owned funds and borrowed funds in the total capital of the business. Capital structure means the proportion between ownership capital and borrowed capital.
For planning an ideal capital structure, attention should be paid to the following factors:
1.
Cost of capital– The entrepreneur should choose a combination that keeps the overall cost of capital low.
2.
Risk involved– More borrowed funds may increase financial risk, so balance is needed.
3.
Control of business– Excess issue of ownership capital may reduce the control of existing owners.
4.
Flexibility– The structure should allow future changes and further finance if needed.
5.
Needs of investors and creditors– Their expectations and confidence should also be considered.
6.
Nature and size of business– The capital pattern should suit the enterprise.
Thus, an ideal capital structure needs careful planning, teamwork, and balance.
Question Q.5.(iv)
Q.5.(iv) Explain the meaning of ‘Working Capital’. Briefly state any four factors that help determining the working capital requirement of a company.
Answer Q.5.(iv)
Working capital means the funds required to meet the day-to-day expenses and current operations of a business. It is needed for purchasing raw materials, paying wages, meeting routine expenses, maintaining stock, and carrying on regular activities smoothly.
Any four factors that determine working capital requirement are:
1.
Nature of business– Manufacturing concerns usually need more working capital than service enterprises.
2.
Size of business– Bigger business operations require more working capital.
3.
Length of production cycle– Longer production process increases requirement of funds.
4.
Credit policy– Liberal credit policy increases working capital because money gets blocked in debtors.
So, working capital is essential for smooth business functioning, and its requirement depends on the size, nature, and working conditions of the enterprise.