1.Meaning and Sources of working capital.

Ans- Working capital refers to the funds needed by a business to conduct its
daily operations, such as payment of wages, purchase of raw material,
covering overhead costs and offering credit services. Working capital can be
subdivided into two areas: regular working capital that provides a steady
base for overall business objectives; and short-term working capital used to
facilitate the day-to-day business operations. Sources of finance for working
capital include bank loans, retained earnings, credit from suppliers, long-
term loans from financial institutions, or proceeds from sale of assets.

Long-Term Loans
A loan is the amount of money that is given to an individual or a company on
the agreement they will repay the amount borrowed in a period that exceeds
12 months and at predetermined interest rates. Long-term loans are usually
secured against certain assets and are offered by commercial banks, the
government and financial institutions. This type of loan provides the long-
term working capital for the business.
Short-Term Loans
Short-term loans are loans that are to be repaid within a year from the time
they are borrowed. Savings banks, cooperatives and the government through
the Small Business Administration are some of the institutions that offer
these loans. Bank overdraft is one such source of business finance. A bank
overdraft is a withdrawal made by a business that exceeds the amount of
balance in its bank account, although the amount of money does not exceed
a set limit.
Line of Credit
This is a form of a loan agreement between the bank and the borrower that
enables the borrower to acquire some amount of the funds on demand, but
the borrower does not have to take the loan. A business may secure working
capital through this service if it has recurring expenses at regular intervals.
Trade Credit
This credit service offered by suppliers allows businesses to get goods and
pay for them later. This is a source of working capital that may be acquired
from all suppliers depending on the business arrangements, the type of
business you conduct and the worth of the credit to be offered.
Asset-Based Financing
A business may use its assets to secure working capital from financial
institutions that offer asset based loans. The asset includes machinery,
vehicle or accounts receivable. Accounts receivable are financial documents
of people or companies that owe money to the business and they may be
traded in to finance working capital at discounting companies.
Inventory Financing
These loans are secured with the business` inventory acting as the security.
Finance for working capital may be acquired through its inventory although
the business cannot sell it until the loan is repaid because the lender has the
right to the inventory until the loan has been repaid.

10 marks
a.Spontaneous Sources of Working Capital Finance: The word spontaneous itself
explains that this source of working capital is readily or easily available to the business in the
normal course of business affairs. The quantum and terms of this credit depend on the industry
norms and relationship between buyer and seller. These sources include trade credit allowed by
the sundry creditors, credit from employees, and other trade-related credits. The biggest benefit
of spontaneous sources as working capital is its effortless raising and insignificant cost
compared to traditional ways of financing.
b.Short Term Sources of Working Capital Finance: Short term sources can be

further divided into internal and external sources of working capital finance. The short-term

internal sources include tax provisions, dividend provisions etc. Short-term external sources

include short-term working capital financing from banks such as bank overdrafts, cash credits,

trade deposits, bills discounting, short-term loans, inter-corporate loans, commercial paper, etc.

c.Long Term Sources of Working Capital Financing: Long term sources can also

be divided into internal and external sources. Long term internal sources of finance are retained

profits and provision for depreciation whereas external sources are Share Capital, long-term

loan, and debentures.

2. Different INVENTORY MODELS.

Ans- models are classified into two major types:

(i) Deterministic Models,(ii) Probabilistic Models.

In brief, the deterministic models are built on the assumption that there is no uncertainty
associated with demand and replenishment of inventories. On the contrary, the probabilistic

models take cognizance of the fact that there is always some degree of uncertainty associated
with the demand pattern and lead time of inventories.Usually, the following three
deterministic models are in use:

A.Economic Ordering Quantity (EOQ) Model-The economic order quantity (EOQ) is the
order quantity that minimizes total holding and ordering costs for the year. Even if all the
assumptions dont hold exactly, the EOQ gives us a good indication of whether or not
current order quantities are reasonable.

Assumptions: Like other economic models, EOQ Model is also based on certain
assumptions:

1. That the firm knows with certainty how much items of particular inventories will be used or
demanded for within a specific period of time.

2. That the use of inventories or sales made by the firm remains constant or unchanged
throughout the period.

3. That the moment inventories reach to the zero level, the order of the replenishment of
inventory is placed without delay.

The above assumptions are also called as limitations of the EOQ Model.

B. Abc analysis-

The ABC classification process is an analysis of a range of objects, such as finished products
,items lying in inventory or customers into three categories. It's a system of categorization, with
similarities to Pareto analysis, and the method usually categorizes inventory into three classes
with each class having a different management control associated :

A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for

a control scheme. Each category can and sometimes should be handled in a different way, with
more attention being devoted to category A, less to B, and still less to C.

Popularly known as the "80/20" rule ABC concept is applied to inventory management as a rule-
of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory remains
in about 20% of the items.

The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20
concept. Here, Rupee / Dollar value of each individual inventory item is calculated on annual
consumption basis.

Thus, applied in the context of inventory, it's a determination of the relative ratios between the
number of items and the currency value of the items purchased / consumed on a repetitive basis :

10-20% of the items ('A' class) account for 70-80% of the consumption

the next 15-25% ('B' class) account for 10-20% of the consumption and

the balance 65-75% ('C' class) account for 5-10% of the consumption.

3. JIT model-