WORKING CAPITAL

- SHASHANK JOGANI, 28

INDEX
Sr. No.
1. 2. 3. 4. 5. 6. 7.

TOPIC
ACKNOWLEDGEMENT INTRODUCTION NEEDS FOR WORKING CAPITAL CONSTITUENTS OF WORKING CAPITAL DETERMINANT OF WORKING CAPITAL SOURCES OF WORKING CAPITAL PROCEDURE FOLLOWED BY INSTITUITIONS FOR GRANTING WORKING CAPITAL FINANCE TO AN ORGANIZATION BIBLIOGRAPHY

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3 4 5 7 8 10 11

8.

13

ACKNOWLEDGEMENT:
I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and others. I would like to extend my sincere thanks to all of them. I am highly indebted to H.R College and the teaching faculty for their guidance and constant supervision as well as for providing necessary information regarding the project and also for their support in completing the project. I would like to express our gratitude towards my parents, fellow friends and the teacher Ms. Tasneem and Ms. Kanchan for their kind co-operation and encouragement which helped me in completion of this project. My thanks and appreciations also goes to all those who have in some ways helped me in developing the project and people who have willingly helped me out with their abilities.

WORKING CAPITAL
INTRODUCTION:
In accounting, Working capital is the difference between the inflow and outflow of funds. In other words, it is the net cash inflow. It is defined as the excess of current assets over current liabilities and provisions. In other words, it is net current assets or net working capital. A study of working capital is of major importance to internal and external analysis because of its close relationship with the day-to-day operations of a business. Working Capital is the portion of the assets of a business which are used on or related to current operations, and represented at any one time by the operating cycle of such items as against receivables, inventories of raw materials, stores, work in process and finished goods, merchandise, notes or bill receivables and cash. Working capital comprises current assets which are distinct from other assets. In the first instance, current assets consist of these assets which are of short duration. Working capital may be regarded as the life blood of a business. Its effective provision can do much to ensure the success of a business while its inefficient management can lead not only to loss of profits but also to the ultimate downfall of what otherwise might be considered as a promising concern.

NEEDS FOR WORKING CAPITAL:

Different industries have different optimum working capital profiles, reflecting their methods of doing business and what they are selling. Businesses with a lot of cash sales and few credit sales should have minimal trade debtors. Supermarkets are good examples of such businesses; Businesses that exist to trade in completed products will only have finished goods in stock. Compare this with manufacturers who will also have to maintain stocks of raw materials and work-in-progress. Some finished goods, notably foodstuffs, have to be sold within a limited period because of their perishable nature. Larger companies may be able to use their bargaining strength as customers to obtain more favorable, extended credit terms from suppliers. By contrast, smaller companies, particularly those that have recently started trading (and do not have a track record of credit worthiness) may be required to pay their suppliers immediately. Some businesses will receive their monies at certain times of the year, although they may in cur expenses throughout the year at a fairly consistent level. For example, travel agents have peak sales in the weeks immediately following Christmas. Working capital needs also fluctuate during the year The amount of funds tied up in working capital would not typically be a constant figure throughout the year. Only in the most unusual of businesses would there be a constant need for working capital funding. For most businesses there would be weekly fluctuations. Many businesses operate in industries that have seasonal changes in demand. This means that sales, stocks, debtors, etc. would be at higher levels at some predictable times of the year than at others.

CONSTITUENTS OF WORKING CAPITAL:

CURRENT ASSETS Inventory Sundry Debtors Cash and Bank Balances Short Term Loans Prepaid Expenses Accrued Incomes CURRENT LIABILITIES Sundry Creditors Short Term Loans Provisions Bills Payable Bank Overdraft Accrued Expenses Outstanding Expenses

Net Working Capital = Current Assets Current Liabilities Net Operating Working Capital = Current Assets Non Interest-bearing Current Liabilities Equity Working Capital = Current Assets Current Liabilities Long-term Debt

DETERMINANT OF WORKING CAPITAL:

The determinants of working capital include: 1. Small or Large Business It is the first determinant of working capital that it is affected with the nature of business. Business may be small or large. In small business, company need high working capital because, small business is relating to trading of goods, for starting small business, you need very small fixed capital but need high working capital for paying day to day expenses. But in large business, we require more fixed capital than working capital for purchasing fixed asset. 2. Small or Large Demand Nature of demand also absolutely affects the working capital need. Some product can be easily sold by businessman, in that business; you need small amount of working capital because your earned money from sale can easy fulfill the shortage of working capital. But, if demand is very less, it is required that you have to invest large amount of working capital because your all fixed expenses must be paid by you. 3. Production Policy Production policy is also main determinant of working capital requirement. Some companies stop or decrease the production level in off seasons, in that time, company may also reduce the number of employees or decrease the purchasing of new raw material, so, it will certainly decrease the amount of working capital but on the side, some company may continue their productions in off season, in that case, they need definitely large amount of working capital. 4. Credit Policy Credit policy is relating to purchasing and selling of goods on credit basis. If company purchases all goods on credit and sells on cash basis or advance basis, then it is certainly company need very low amount of working capital. But if in company, goods are purchased on cash basis, and sold on credit basis, it means, our earned money will receive after sometime and we require large amount of working capital for continuing our business. 5. Dividend Policy Dividend policy also effect working capital requirement. Company can distribute major part of

net profit. But, if there is no reserve, we have to invest large amount in working capital because, lacking of reserve will affect on adversely on fulfill our liabilities. 6. Manufacturing Cycle Manufacturing cycle means the process of converting raw material into finished product. Long manufacturing cycle will create the situation in which we require large amount of working capital. 7. Business Cycle There are two main part of business cycle, one is boom and other is recession. In boom, we need high money or working capital for development of business but in recession, we need only low amount of working capital. 8. Price Level Changes If there is increasing trend of products prices, we need to store high amount of working capital, because next time, it is precisely that we have to pay more for purchasing raw material or other service expenses. Inflation and deflation are two major factors which decide the next level of working capital in business. 9. Effect of External Business Environmental Factors There are many external business environmental factors which affect the need of working capital like fiscal policy, monetary policy and bank policies and facilities.

SOURCES OF WORKING CAPITAL:

A company can choose to finance its current assets by: A) B) C) Long term sources Short term sources A combination of them Long Term Sources of Working Capital: Issue of Shares Retained Earnings Issue of Debentures Long Term Debt Other sources like sale of fixed assets, etc. Short Term Sources of Working Capital: Commercial Banks Public Deposits Various Credits Reserves and other funds Sources of additional working capital: Existing cash reserves Profits (when one secures it as cash) New equity or loan from shareholders Long term loans Bank Overdraft line of credit

PROCEDURE FOLLOWED BY INSTITUITIONS FOR GRANTING WORKING CAPITAL FINANCE TO AN ORGANIZATION:

Procedures to avail working capital financing from banks: Banks exercise extreme caution in lending to first time applicants starting up their business. A first time applicant would be asked for collateral in the form of land, building or residential property. This would be in addition to a second charge on the fixed assets of the enterprise. Sequence of steps to avail working capital

Application for the working capital Most of the large commercial banks are moving towards the trend of specialized SSI branches near the industrial concentrations. The applications for working capital are generally accepted and processed at these branches. Documents accompanying the application The application for working capital would need to have a covering letter containing a request for sanction of working capital limits. A number of documents are also required to be enclosed along with it In- Principle Sanction for Working Capital The timeframe for in-principle sanction depends upon two factors:
o o

Time taken for submission of necessary documents The decision structure at the bank

The timeframe for a Final Sanction in cases where all the requirements have already been submitted by the borrowing unit is 90 days from the submission of the application.

Post Sanction Requirements Post sanction requirements involve completion of documentation creating a charge in favor of the bank.

Monitoring and follow-up Working capital financing is extended for the current asset build up of a business, which is linked to its activity level. These assets are mobile (in case of inventory) and also easily convertible into cash. At best, the banks have a second charge on the fixed assets

of the enterprise and without the power of Seizure (u/s Sec 29 as available to the state financial institutions) realizing money from the security is time consuming. Hence, banks pay extremely high importance to the monitoring and follow-up of the loan.

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Working_capital http://www.workingcapital.org/ http://tutor2u.net/business/finance/workingcapital_cycle.htm http://womeninbusiness.about.com/od/glossaryofbusinessterms/a/def-workingcap.htm http://www.caalley.com/art/WorkingCapitalManagement.pdf http://www.sagepub.com/upm-data/5005_Seidman_Chapter_5.pdf http://www.scribd.com/doc/51060004/8/SOURCES-OF-WORKING-CAPITAL http://www.transtutors.com/homework-help/Financial+Management/Statement+of+ChangesFP/working-capital-sources.aspx