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Corporate Sector
Definition
Pakistan Inc. is a common term used by the Pakistani media to refer to the
corporate sector of the nation. The Securities and Exchange Commission of Pakistan
(SECP) is an organization whose purpose is to develop a modern and efficient corporate
sector and a capital market based on sound regulatory principles
Financial
Companies Insurance Banking
43,618 Services 244 56 47
Incorporated Companies Companies
Companies
Local general
Private companies Modaraba
39,628 64 insurance 48
limited by share companies
companies
Local life
Public non-listed Investment
2,214 57 insurance 3
companies advisors
companies
Foreign general
Public listed
687 Modarabas 47 insurance 3
companies
companies
Foreign companies 643 Close-end mutual 37 Foreign life 2
funds insurance
companies
Welfare
Leasing
organisations and 357 30
companies
associations
Asset
Trade companies
83 management 4
limited by guarantee
companies
Open-end mutual
Unlimited companies 6 3
funds
Credit rating
2
companies
1) Debt Financing
Business owners may have some trepidation about borrowing from a
financial institution, as it means relinquishing some cash profits. But it could be a
good option so long as you expect to have sufficient cash flow to pay back the
loans, plus interest. The major benefit for debt financing, unlike with equity
financing, you'll retain full ownership of your business. The interest on business
loans is also tax-deductible, and you’ll build your credit.
Small businesses frequently take bank loans. They are usually easy to
obtain – so long as you have good credit, enough equity to cover the payments
and you're not already carrying heavy debts. These loans are generally granted
either on a short-term basis of less than one year or long-term basis of more than
one year.
Commercial finance companies also lend money and are willing to fund
riskier ventures that don't have solid financials. But this type of funding usually
comes with high interest.
2) Equity Financing
Small business owners when weighing debt and equity financing options
often opt for equity financing because they have concerns about either qualifying
for 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.
Moreover, if no profit materializes, you aren’t obligated to pay back equity
contributions.
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
OwnershipCapital
In this context, 'owners' refers to those people/institutions who are shareholders.
Sole traders and partnerships do not have shareholders - the individual or the partners
are the owners of the business but do not hold shares. Shares are units of investment in
a limited company, whether it is a public or private limited company. Shares are
generally broken down into two categories:
Ordinary shares
Preference shares
Non-Ownership Capital
Whilst the following sources of finance are important, they are not classed as
Ownership Capital - Debenture holders are not shareholders, nor are banks who lend
money or creditors. Only shareholders are owners of the company.
Debentures
Other loans
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 or
shareholder has at their disposal to do with as they wish. If that person uses their
savings to invest in their own or another business, then the source of finance comes
under the heading of personal savings.
Although we would generally discuss personal savings as a source of finance for small
businesses, there are many examples where business people have used substantial sums
of 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 a
business makes a profit and it does not spend it, it keeps it - and accountants call profits
that 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 new
machinery, 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 the
future 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 the
money 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 and
so on. Working capital is defined as:
Where:
current assets are short term sources of finance such as stocks, debtors and cash - the
amount of cash and cash equivalents - the business has at any one time. Cash is cash in
hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short
term and highly liquid investments which are easily and immediately convertible into
cash.
current liabilities are short term requirements for cash including trade creditors,
expense creditors, tax owing, dividends owing - the amount of money the business owes
to other people/groups/businesses at any one time that needs to be repaid within the next
month or so.
Sale of Assets
Business balance sheets usually have several fixed assets on them. A fixed asset is
anything 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 of
these 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 stop
offering 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 its
fixed assets, therefore, has an effect on the potential capacity of the business - the
amount 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 regular
amount 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 car
and at the end of the period (normally about two years), the business swaps the car for a
newer model.
• More expensive in the long run, because the leasing company charges fees which make the total
cost greater than the original cost.
Hire Purchase
Business hires the equipment for a period of time making fixed regular payments. Once
payments have finished it then owns the piece of equipment. Hire purchase is different to
leasing 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 to
the business) to a debt factoring company.
The factoring company pays the business - say 80-90% of face value of the debts - and
then collects the full amount of the debts. Once it has done this it will pay the remaining
amount to the business less a charge.
It is a good way of raising cash quickly, without the hassle of chasing payments. BUT it
is 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 following
reasons:
Assisted Areas
Regional Selective Assistance
Trade Credit
A business does not always have to pay their bills as soon as they receive them. They are
given period of credit, normally around 30-60 days. By trying to extend this period they
can improve their short-term finance position.
Small businesses now have some protection under law that prevents larger firms
exploiting their credit terms.
Trade credit is an important source of finance for nearly all businesses – since it is
effectively a free source of finance.
Retained Profits
The cheapest form of finance is the business’ own profits. In the UK over 80% of
retained profits are reinvested back into the business. Since it is not being borrowed from
anyone, it does not cost money to use.
Own Capital
For sole traders and partnerships a common source of finance, especially for start up is
money from the individuals who are forming the business. They may also borrow money
from family and friends. Own capital is a costless form of finance, but carries the risk of
the money being lost.
Working Capital
Working capital is the amount of money available for the day to day running of the
business. It is the difference between current assets and current liabilities. See below for
more details of how working capital can be used.
Public sector organizations receive from both the normal sources that most businesses
receive money, but also from tax revenues. Most public sector organizations, such as
schools and hospitals obtain more straight from the government - who have previously
collected the money from tax payers.
Other organizations gain money from sales, e.g. stamps for the Post Office, and licenses
for the BBC.
Conclusion:
Pakistan is a developing country and its economy is going to a depression. Most of the
organisations are not certain about the government also, but a lot of opportunities are
available for them.
The above data suggests that debt and equity have got certain advantages as well as
disadvantages, but debt has got more advantages in Pakistan, so debt is more suitable
option 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 increase
the 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