FUNDRAISING

Fundraising or fund raising (also known as "development") is the process

of Soliciting and gathering voluntary contributions of money or
other resources, by requesting donations from individuals, businesses,
charitable foundations, or governmental agencies. Although fundraising
typically refers to efforts to gather money for non-profit organizations, it is
sometimes used to refer to the Identification and solicitation of investors or
other sources of capital for for-profit enterprises.

Development Capital: When the funds are raised by an existing business for
the purpose of expansion of operations, it is termed as development capital.
Sources of Raising Funds:
 Initial Public Offer (IPO)
 Follow-On Public Offer (FPO)
 Private Placement
 Rights Issue
 Preference Capital
 Private Equity/Venture Capital
 Bank Finance
 Debenture Issue
 Crowd Funding
 Bootstrapping
 Friends and Family
DETERMINATION OF CAPITAL STRUCTURE
• Capital Structure means the proportion of debt and equity used for financing the
capital for a business.
• It involves a decision on the long term sources of funds.
• Thus, optimizing a company’s capital structure is critical to its ability to achieve
near-and long-term growth objectives.
• Long Term Solvency of the business can be ascertained through the capital
structure by analysing the leverage ratios-
I. Debt-Equity Ratio
II. Debt-Assets
III. Debt-Total Capital

Let’s have a look at the steps that should be taken into account when determining an
ideal capital structure
UNDERSTANDING THE
FINANCIALS MANAGING CASH FLOWS
AND DEBT
Before determining the ANTICIPATING
The ability to cover financial MANAGING THROUGH
dynamics of its optimal capital INTEREST RATE
obligations out of cash flows in UNFORSEEN EVENTS
structure, a company needs to CHANGE
have a comprehensive both good and bad times should Since the inception of the
Interest rate risk serves as
understanding of its financial be considered as part of the financial crisis, it’s evident
another factor that needs to
position. An analysis should determination of borrowing that practically no company
be considered when
include a review of how [Link] the simplest terms, a is immune from large
determining optimal
operating and financial company’s debt capacity comes drops in demand or a
capital structure. It’s
leverage will affect the down to its ability to repay debt global credit crunch.
important to pose the
company’s ability to make loan and to support ongoing working Therefore, when evaluating
question: Is the company or
payments. In addition, finance capital. Certain types of debt capacities or
acquirer assuming a fixed
executives should focus on all businesses might be subject to a examining restructuring
rate, a floating interest rate
cash requirements, including higher level of uncertainty options, companies and
or interest rate floors? Even
short and long term capital concerning their cash flows, and potential acquirers need to
if a company achieves most
needs. To determine if the should consider their ability to conduct a sensitivity
of its forecast assumptions,
company’s working capital meet future interest and principal analysis that takes into
a significant increase in
projections are reasonable, a repayment obligations. account the possibility of
future interest rates could
sensitivity analysis is critical, Ultimately, companies with what may appear to be
adversely affect its ability
which can help business extremely unpredictable cash unlikely economic
to cover its financial
leaders understand the impacts flows will typically lower their outcomes
obligations.
of their financial decisions and reliance on debt as a percentage
projections by incorporating of total capital.
fluctuating Variables
FACTORS AFFECTING THE CAPITAL STRUCTURE:

1) Cash Flow Position:

While making a choice of the capital structure the future cash flow position should be kept in mind.
Debt capital should be used only if the cash flow position is really good because a lot of cash is needed
in order to make payment of interest and refund of capital.

(2) Interest Coverage Ratio-ICR:

With the help of this ratio an effort is made to find out how many times the EBIT is available to the
payment of interest. The capacity of the company to use debt capital will be in direct proportion to this
ratio.
It is possible that in spite of better ICR the cash flow position of the company may be weak. Therefore,
this ratio is not a proper or appropriate measure of the capacity of the company to pay interest. It is
equally important to take into consideration the cash flow position.

(3) Debt Service Coverage Ratio-DSCR:

This ratio removes the weakness of ICR. This shows the cash flow position of the company.
This ratio tells us about the cash payments to be made (e.g., preference dividend, interest and debt
capital repayment) and the amount of cash available. Better ratio means the better capacity of the
company for debt payment. Consequently, more debt can be utilised in the capital structure.
(4) Return on Investment-ROI:
The greater return on investment of a company increases its capacity to utilise more debt capital.

(5) Cost of Debt:

The capacity of a company to take debt depends on the cost of debt. In case the rate of interest on the
debt capital is less, more debt capital can be utilised and vice versa.

(6) Tax Rate:

The rate of tax affects the cost of debt. If the rate of tax is high, the cost of debt decreases. The reason is
the deduction of interest on the debt capital from the profits considering it a part of expenses and a
saving in taxes.
For example, suppose a company takes a loan of 0ppp 100 and the rate of interest on this debt is 10%
and the rate of tax is 30%. By deducting 10/- from the EBIT a saving of in tax will take place (If 10 on
account of interest are not deducted, a tax of @ 30% shall have to be paid).

(7) Cost of Equity Capital:

Cost of equity capital (it means the expectations of the equity shareholders from the company) is
affected by the use of debt capital. If the debt capital is utilised more, it will increase the cost of the
equity capital. The simple reason for this is that the greater use of debt capital increases the risk of the
equity shareholders.
Therefore, the use of the debt capital can be made only to a limited level. If even after this level the
debt capital is used further, the cost of equity capital starts increasing rapidly. It adversely affects the
market value of the shares. This is not a good situation. Efforts should be made to avoid it.
(8) Floatation Costs:
Floatation costs are those expenses which are incurred while issuing securities (e.g., equity shares,
preference shares, debentures, etc.). These include commission of underwriters, brokerage, stationery
expenses, etc. Generally, the cost of issuing debt capital is less than the share capital. This attracts the
company towards debt capital.

(9) Risk Consideration: There are two types of risks in business:

(i) Operating Risk or Business Risk:
This refers to the risk of inability to discharge permanent operating costs (e.g., rent of the building,
payment of salary, insurance installment, etc),
(ii) Financial Risk:
This refers to the risk of inability to pay fixed financial payments (e.g., payment of interest, preference
dividend, return of the debt capital, etc.) as promised by the company.
The total risk of business depends on both these types of risks. If the operating risk in business is less,
the financial risk can be faced which means that more debt capital can be utilised. On the contrary, if the
operating risk is high, the financial risk likely occurring after the greater use of debt capital should be
avoided.

(10) Flexibility:
According to this principle, capital structure should be fairly flexible. Flexibility means that, if need be,
amount of capital in the business could be increased or decreased easily. Reducing the amount of capital
in business is possible only in case of debt capital or preference share capital.
If at any given time company has more capital than as necessary then both the above-mentioned capitals
can be repaid. On the other hand, repayment of equity share capital is not possible by the company
during its lifetime. Thus, from the viewpoint of flexibility to issue debt capital and preference share
capital is the best.
(11) Control:
According to this factor, at the time of preparing capital structure, it should be ensured that the control
of the existing shareholders (owners) over the affairs of the company is not adversely affected. If funds
are raised by issuing equity shares, then the number of company’s shareholders will increase and it
directly affects the control of existing shareholders. In other words, now the number of owners
(shareholders) controlling the company increases.

(12) Regulatory Framework:

Capital structure is also influenced by government regulations. For instance, banking companies can
raise funds by issuing share capital alone, not any other kind of security. Similarly, it is compulsory for
other companies to maintain a given debt-equity ratio while raising funds.

(13) Stock Market Conditions:

Stock market conditions refer to upward or downward trends in capital market. Both these conditions
have their influence on the selection of sources of finance. When the market is dull, investors are
mostly afraid of investing in the share capital due to high risk.

(14) Capital Structure of Other Companies:

Capital structure is influenced by the industry to which a company is related. All companies related to
a given industry produce almost similar products, their costs of production are similar, they depend
on identical technology, they have similar profitability, and hence the pattern of their capital structure
is almost similar.
 Trading on Equity
Situation I Situation II Situation III
EBIT 7,00,000 7,00,000 7,00,000
(Earnings Before 0 -1,00,000 -2,00,000
Interest and Tax) (10% of 10 (10% of 20 lakhs)
Less: Interest lakhs)
EBT 7,00,000 6,00,000 5,00,000
(Earnings Before -2,10,000 -1,80,000 -1,50,000
Tax) Less: Tax (30% of 7 (30% of 6 (30% of 5 lakhs)
(30% of EBT) lakhs) lakhs)
EAT 4,90,000 4,20,000 3,5000
(Earning After
Tax)
EPS 0.98 1.05 1.16
(EAT / No. of [4,90,000/ [4,20,000/ [3,50,000/3,00,000
Equity Shares) 5,00,000] 4,00,000] ]
 On the Flipside
Situation II Situation III
Situation I
EBIT 3,00,000 3,00,000 3,00,000
(Earnings Before 0 - 1,00,000 - 2,00,000
Interest and Tax) (10% of 10 lakhs) (10% of 20 lakhs)
Less: Interest
EBT 3,00,000 2,00,000 1,00,000
(Earnings Before - 90,000 - 60,000 - 30,000
Tax) Less: Tax (30% of 3 lakhs) (30% of 2 lakhs) (30% of 1 lakh)
(30% of EBT)
EAT 2,10,000 1,40,000 70,000
(Earning After
Tax)
EPS 0.42 0.35
(EAT/ No. of [2,10,000/ [1,40,000/4,00,
Equity Shares) 5,00,000 ] 000]
 COST OF CAPITAL
• Intuitively, the overall cost of capital of a firm should be the blend of the costs of
the different costs of the sources of the capital. In fact we calculate the cost of
capital as the weighted average of its equity and Debt cost of capital, known as the
firm’s average weighted cost of capital.
FACTORS AFFECTING THE COST OF CAPITAL

INTERNAL FACTORS

1. Capital Structure Policy 

A firm has control over its capital structure, targeting an optimal capital structure.
As more debt is issued, the cost of debt increases, and as more equity is issued, the
cost of equity increases.

2. Dividend Policy
Every company has to make dividend policy. What amount of total earning,
company is interested to pay as dividend. For this, we have to study Price-
Earning Ratio (Dividend/EPS). If Price earning ratio will increase, cost of
retained earning will decrease because we will less money which have retained
and use for promoting of business as source of fund.

3. Investment Policy
It is assumed that, when making investment decisions, the company is making
investments with similar degrees of risk. If a company changes its investment
policy relative to its risk, both the cost of debt and cost of equity change.
 External Factors
1. Level of Interest Rates
The level of interest rates will affect the cost of debt and, potentially,
the cost of equity. For example, when interest rates increase the cost
of debt increases, which increases the cost of capital.

2. Tax Rates
Tax rates affect the after-tax cost of debt. As tax rates increase, the
cost of debt decreases, decreasing the cost of capital.
 COST SAVING STRATEGY
• Cost Saving is the process used by companies to reduce their costs and increase
their profits. Depending on a company’s services or Product, the strategies can
vary. Every decision in the product development process affects cost.
• Companies typically launch a new product without focusing too much on cost. Cost
becomes more important when competition increases and price becomes a
differentiator in the market.
Three key factors to a successful cost saving strategy

Reducing overall operating costs

Improving the management of utility

contracts and relationships

Reducing the waste generally across all

departments within a business
A good cost reduction company will deal directly with the client, the supplier and the

client’s supplier . The process:

1. In-depth audit of current

expenditure

2. Data analysis and

market
5. On-going
analysis/tendering
monitoring, query
management and
implementation of
improved
administrative
procedures 3. Presentation of
report, detailing the
findings and
recommendations

4. Implementation of
all agreed
recommendations
 SOME OF THE COST SAVING
STRATEGIES
• Staff Reductions: Since 65 to 70% of a firm’s operating costs
are related to staffing, that is generally the first place we
look to reduce costs. It is all too common to think of layoffs
and reduction in staff as a way to respond to the call from
senior management to tighten belts.

• Workload Alterations: Since staffing represents the biggest

part of budget, there must still be a way to affect those
Traditional cost- numbers without affecting service and occupancy
cutting/Saving measures negatively. And there are effective ways to minimize the
number of people required to do the job. It involves
typically fall into one of changing the workload so that not as many agents are
these four categories: required.

• Application of Technology: Investing in new technology

may not be an option in tight budgets, but it is the rare
company that cannot benefit from more effective use of the
technology in place.

• Process Reengineering