Revolving Fund Meaning Structure How Does It Work

Revolving Fund Meaning

Explanation

The revolving fund is established to carry out specific activities, and the primary advantage of this fund is it may be loaned or spent repeatedly. The basic idea behind that fund is a fund or money backup that remains available to finance organizations continuing activities. It circulates between the fund and the members.The initial contribution of this fund comes from its members, i.e., through initial fund investment in the case of Non-Governmental organizations. In the case of Governmental organizations, it comes from the National (Central or State) Government, and in the case of Non-profit making organizations, it comes from donors.

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How Does the Revolving Fund Work?

The initial loan of revolving funds came from its members, donors, Government, or a third party. Then this fund is collectively given to one of its members who need money where the fund establishment authority charges interest at a nominal rate or lower than the market rate. Those who had initial fund investment are also given interest on the money invested. Or, the fund can be invested in specific activities; or it may be expended for a particular purpose, which benefits the long run.Interest may be a nominal rate or lower than the market rate. At the year-end or after a specific period, the fund is returned by a borrower to a lender, i.e., fund establishment authority. Again the fund is given to another willing borrower or invested or expended. In this way, rotation of funds takes place, and fund establishment authority earns the income from a fund, which is the difference between interest charged from the borrower and interest given to members, i.e., investors, and that income is used for the welfare of members.It is necessary for the fund establishment authority to acquire legal status for clear terms and conditions between the fund establishment authority and its members. Also, legal status increases investors’ faith that their money is in safe hands and cannot be misused. After establishing legal status, it is necessary to comply with the fund’s statutory and other legal requirements.In non-profit making organizations, sometimes the donor gives the money to the managing authority of the Non-profit making organization and directs them that it should be used for a specific purpose like renovation of a building, etc., only. Till that purpose initiates, the managing authority invests the fund, and income is credited to the fund only, and then it is to be expended for the purpose it was given.

Management and Administration

As discussed above, legal recognition of funds increases investors’ faith; hence it becomes necessary to legally recognize the fund and comply with all the norms relating to funding for maintaining legal status. But sometimes, some fund-establishing authorities do not legalize the fund, and that type of fund is called an informal revolving fund.It is managed by managing authorities called a management team decided by members of the fund is a legally recognized fund. It is necessary to submit all the reports to the registered authority. Audit of the fund becomes essential, and submission of an audit report and other reports like contributories list, amount of contribution, receipts and payment statement, etc., are to be submitted to the registered authority of the fund. Annual accounts and annual reportsAnnual Accounts And Annual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of the fund are also to be sent to members of the fund.In the case of the informal revolving fund, it is not required to submit a report as it is not registered. But it is recommended that an audit be done and a report be sent to the members. However, the chances of bankruptcy by the borrower are high; hence no guarantee of money.

Structure

A revolving fund is established by its members who are users of funds for some specific purpose. Then members decide regarding the managing authority of the same along with deciding whether to recognize the fund or not legally.After that, members collect an initial fund investment, and then the fund is given to the member who needs and is willing to borrow at agreed terms. At the year-end, the interest is given to investors, and audited annual accounts are also sent to investors.In the case of the legal revolving fund, all statutory requirements must be complied with, and all documentation relating to funding is to be submitted to the registering authority.

Sustainability

The operations of the revolving fund are to be monitored periodically. It usually becomes self-sufficient after a specific period, but factors responsible for its failure are inflation, imbalance in interest incomeInflation, Imbalance In Interest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more and expenditure, liabilities, hefty legal expenses, etc. The proper management of the fund and fast recovery of the cost generates a sense of ownership and financial viability and increases sustainability and faith.

Importance

The revolving fund is vital for its borrowers as they get easy and convenient finance. Similarly, it is essential for the users as they get the return on investment and borrowing option in case of need, and that too at affordable rates. In the case of non-profit organizations, it is essential as they get the return on funds provided by the borrower, which is also used for that specific purpose. And if managed properly, revolving funds build self-sufficiency.

Conclusion

The revolving fund is established by its investors for some specific purpose. The initial fund investment is collected from members, who will decide the managing authority. The managing authority will decide whether to lend, invest, or expend funds for some specific purpose. They also decide whether the fund is to be legally recognized or not, that too, with members’ consent. The sustainability of funds depends upon members and management. If properly managed, the fund becomes self-sufficient after a specific period.