The utilization of funds may take the form of either a) an increase in assets both fixed current, or b) a decrease in liabilities. Lets know the various uses of bank funds.
Uses of bank funds
- Capital expenditure: The amounts to be spent for acquiring additional fixed assets and for normal replacement and renewals are to be shown separately under the relevant periods. Moreover, the total of the figures relating to the project shone against this item should be equal to the figure of capital cost of the project as shown in the statement of cost of the project.
- Decrease in Long-term Loans: The long-term loans raised form financial institutions are repayable in installments as per the schedule of repayment agreed upon. Similarly, payment for plants and machinery purchased on deferred payment basis is to be made in an agreed manner. The installments of these payments should be shown under the respective years.
- Increase in Current Assets: Estimates about the increase in the amount of book debts, stock in trade, bills receivable and other current assets are to be shown under this head. The level of these assets increases with an increase in the level of working capital raise through short –term borrowings.
- Decrease in Use cured Loans and other current Liabilities: The short-term borrowings are to be repaid, as per the terms agreed upon. The cash credit limits are fixed on year-to-year basis and are usually renewed. The amount of such loans should not be shown as repaid.
- Interest on Long-term Loans: Interest payable on term loans (including the loan for which application is being made) is to be shown against this item. The term loans are repayable in installments. Hence, the amount of interest payable on the outstanding amount of loans goes on declining, as the installments are paid in a subsequent years.
- Taxation: As the concern starts earning profits, provision for taxation is to be taken into account. The concern may, however, take few years time to earn profits. Moreover, if the Government has granted any tax-holiday for the concern for a certain period, no amount is payable as tax during that period.
- Dividend: The amounts of dividends that are expected to be declared in future years out of the profits of the company are to be shown as cash outflow. Dividends are payable only when the company starts earning profits. Moreover, a portion of the net profit is usually ploughed back in the business itself to consolidate the financial position of the company and to retain its funds within the business.
Here are the major uses of bank funds, there may be more uses of bank funds but this seven is the most common and important uses of bank funds.
Related Content of Bank Funds:
- Various Sources of Bank Funds
- Management of Bank Fund
- Bills Purchased and Discounted is Way of Employing the Bank Funds
- How to Prepare Fund Flow Statement?
- Nature of Funds Flow and Cash Flow Statements