PROJECT REPORT ON

“ WORKING CAPITAL FINANCE FROM BANKS”

MASTER OF MANAGEMENT STUDIES

SEMESTER III

2020-2021

Submitted By:-

Pranjali Jagannath shinde

ROLL NO:-19100

SWAYAM SIDDHI COLLEGE OF MANAGEMENT AND RESEARCH

BHIWANDI – 421302

2020-2021

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 DECLARATION

I, Pranjali Jagannath Shinde the student of MMS Semester III (2020-21)

hereby declare that I have completed the project on “Working Capital Finance

From Banks”

The information submitted is true and original to the best of my knowledge.

SIGNATURE

ROLL NO.: 19100

PRANJALI JAGANNATH SHINDE

SWAYAM SIDDHI COLLEGE OF MANAGEMENT AND RESEARCH

Kalyan Road, Bhiwandi District, , Thane, Maharashtra 421302

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 CERTIFICATE

Certified that the Summer Internship Project, entitled “Working Capital

Finance From Banks” submitted by Mr./Mrs. Pranjali Jagannath shinde

towards partial fulfilment for the Master of Management Studies is based on the

investigation carried out under our guidance. The project part therefore has not

submitted for the academic award of any other university or institution.

Prof. Rahul Shah

Project Guide.

Mr. Arloph Johnvieira

Director.

Place: Swayam Siddhi College of Management and Research, University of

Mumbai.

Date:

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 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and

depth is so enormous.

I would like to acknowledge the following as being idealistic channel and fresh

dimensions in the completion of this project.

I take this opportunity to thank that University of Mumbai for giving me chance

to this project.

I would like to thank my Director Mr. Arloph Johnvieira for providing the

necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator Prof. Rahul Shah for her moral

support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof.

Rahul Shah whose guidance and care made the project successful.

I would like to thank my college library, for having provided various reference

books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly

helped me in the completion of the project especially my Parents, peers who

supported me throughout my project.

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 EXECUTIVE SUMMARY

it gives me great pleasure to present this project report on working capital

finance at bank of Maharashtra, cre. the main objective of the project was to

study various types of working capital finance provided by banks. to know

details the procedure of assessment of working capital finance extended by

banks. wheels of business cannot move without money. availability of money is

being limited and wants being unlimited. so procurement of fund is one of the

important functions in commercial & non-commercial enterprises and utilizes it

for maximization of business profits.

business enterprises need funds to meet their different types of requirements,

I. long-term requirement

II. medium-term requirement

III. short-term requirement

working capital requirement is the short-term requirement. working capital is

the investment needed for carrying out day-to-day operations of the business

smoothly. bank is one of the important sources of working capital requirement.

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 INDEX

SR. PAGE
NO. CONTENTS OF PROJECT NO.
Chp. 1 Introduction 7 - 10
objectives
scope of study

Chp.2 Research Methodology 11

Chp.3 Data collection 12-30

Need for working capital

financing of working capital ( Banking finance)

Security required in bank finance

Regulation of bank finance

Assessment of working capital

Working capital policies and types

How to determine your working capital needs

Chp.4 Finding and suggestion 32

Chp.5 conclusion 33

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 CHAPTER : 1

INTRODUCTION

Working capital financing is done by various modes such as trade credit, cash credit/bank

overdraft, working capital loan, purchase of bills/discount of bills, bank guarantee, letter of

credit, factoring, commercial paper, inter-corporate deposits etc.

The arrangement of working capital financing forms a major part of the day to day activities

of a finance manager. It is a very crucial activity and requires continuous attention because

working capital is the money which keeps the day to day business operations smooth.

Without appropriate and sufficient working capital financing, a firm may get into troubles.

Insufficient working capital may result in non-payment of certain dues on time. Inappropriate

mode of financing would result in loss of interest which directly hits the profits of the firm.

The term working capital is commonly used for the capital required for day-to-day

working in a business concern, such as for purchasing raw material, for meeting day-to-day

expenditure on salaries, wages, rents rates, advertising etc. Working capital refers to the

circulating capital required to meet the day to day operations of a business firm. Working

capital may be defined by various authors as follows:

1. According to Weston & Brigham - “Working capital refers to a firm’s investment in short

term assets, such as cash amounts receivables, inventories etc

The term “working capital” is often referred to “circulating capital” which is frequently used

to denote those assets which are changed with relative speed from one form to another i.e.,

starting from cash, changing to raw materials, converting into work-in-progress and finished

products, sale of finished products and ending with realization of cash from debtors. Working

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capital has been described as the “life blood of any business which is apt because it

constitutes a cyclically flowing stream through the business”

Working capital can be utilized for operating costs that are involved in the everyday life of

business. Even very successful business owners may need working capital funds when the

unexpected circumstances arises.

Working capital is highly important in firms as it is used to generate further return for the

stakeholders. When working capital is managed improperly, allocating more than enough of

it will render management non-efficient & reduce the benefits of short term investments. On

the other hand, if working capital is too low, the company may miss a lot of profitable

investment opportunities or suffer short term liquidity crises, leading to degradation of

company credit, as it cannot respond effectively to temporary capital requirements.

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 OBJECTIVES

➢ To know the various types of working capital finance provided by banks.

➢ To analyse in detail the procedure of assessment of working capital finance extended

by bank.

➢ The main purpose of this project to access the financial viability of the loan proposal to

access the actual worth of the borrower.

➢ This study would also involve working out and interpreting the financial ratios in case

of working capital financing.

• To study the various loan facilities provided by the bank such as Cash credit, packing

credit, letter of credit and so on.

• To understand the loan appraisal process starting from receiving of the application till

Post disbursement and monitoring of the borrower.

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 SCOPE OF STUDY

The management of working capital helps us to maintain the working capital at a satisfactory

level by managing the current assets and current liabilities. It also helps to maintain proper

balance between profitability, risk and liquidity of the business significantly. By managing

the working capital, current liabilities are paid in time. If the firm makes payment to it

creditors for raw material in time, it can have the availability of raw material regularly, which

doesn t cause any obstacles in production process. Adequate working capital increases paying

capacity of the business but the excess working capital causes more inventory, increases the

possibility of delay in realization of debts. On the other hand, absence of adequate working

capital leads to decrease in return on investment. The goodwill of the firm is also adversely

affected due to the inability to pay current liabilities in time. Hence, the management of

working capital helps to manage all the factors affecting the working capital in the most profitable

manner

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 CHAPTER : 2

RESEARCH METHODOLOGY

This research project is based on primary and secondary data

1. Primary Data:-

The information collected in the primary data is based on questionnaire and survey method

by using the statistical analysis.

2. Secondary Data:-

The secondary data as it has always been important for the completion of any report

provides a reliable, suitable, adequate and specific knowledge. The standard cost reports,

working sheets provide the knowledge and information regarding the relevant subjects.

The information collected in the secondary data is based on different sources like internet,

websites, books, magazines and journals etc. Secondary data’s has been obtained from

published reports like the annual reports of the company, balance sheets, and profit and loss

account, booklets, records such as files, reports maintained by the company. Mainly the

annual report consists of two parts; 1) Profit and Loss Account 2) Balance Sheet Profit and

loss account reveals the income and expenditure of the company. Balance Sheet reveals the

financial position of the organization. Those two statements are prepared by the highly

qualified and experts with the help of available information or data.

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 CHAPTER:4

DATA COLLECTION

INTRODUCTION TO WORKING CAPITAL :-

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. The funds required and acquired by a business may be

invested to two types of assets:

1. Fixed Assets.

2. Current Assets

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 3. Fixed assets are those which yield the returns in the due course of time. The various

decisions like in which fixed assets funds should be invested and how much should be

invested in the fixed assets etc.

These types of assets are required to ensure smooth and fluent business operations and
can be said to be life blood of the business. There are two concepts of working capital
Gross and Net. Gross working capital refers to gross current assets. Net working
capital refers to the difference between current assets and current liabilities. The term
current assets refers to those assets held by the business which can be converted into
cash within a short period of time of say one year, without reduction in value. The
main types of current assets are stock, receivables and cash. The term current
liabilities refer to those inabilities, which are to be paid off during the course of
business, within a short period of time say one year. They are expected to be paid out
of current assets or earnings of the business. The current liabilities mainly consist of
sundry creditors, bill payable, bank overdraft or cash credit, outstanding expenses etc.

1. The fixed assets are required to be retained in the business over a period of time
and they yield the returns over their life, whereas the current assets loose their identity
over a short period of time, say one year.

2. In the case of current assets, it is always necessary to strike a proper balance

between the liquidity and profitability principles, which is not the case with fixed
assets. E.g. If the size of current assets is large, it is always beneficial from the
liquidity point of view as it ensures smooth and fluent business operations. Sufficient
raw material is always available to cater to the production needs, sufficient finished
goods are available to cater to any kind of demand of customers, liberal credit period
can be offered to the customers to improve the sales and sufficient cash is available to
pay off the creditors and so on.

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 NEED FOR WORKING CAPITAL

The need of gross working capital or current assets cannot be overemphasized. The object of

any business is to earn profits. The main factor affecting the profits is the magnitude of sales

of the business. But the sales cannot be converted into cash immediately. There is a time lag

between the sale of goods and realization of cash. There is a need of working capital in the

form of current assets to fill up this time lag. Technically, this is called as operating cycle or

working capital cycle, which is the heart of need for working capital. This working capital

cycle can be described in the following words. If the company has a certain amount of cash, it

will be required for purchasing the raw material though some raw material may be available

on credit basis. Then the company has to spend some amount for labour and factory

overheads to convert the raw material in work in progress, and ultimately finished goods.

These finished goods when sold on credit basis get converted in the form of sundry debtors.

Sundry debtors are converted in cash only after the expiry of credit period. Thus, there is a

cycle in which the originally available cash is converted in the form of cash again but only

after following the stages of raw material, work in progress, finished goods and sundry

debtors. Thus, there is a time gap for the original cash to get converted in form of cash again.

Working Capital needs of company arise to cover the requirement of funds during this time

gap, and the quantum of working capital needs varies as per the length of this time gap. Thus,

some amount of funds is blocked in raw materials, work in progress, finished goods, sundry

debtors and day-to-day requirements. However some part of these current assets may be

financed by the current liabilities also. E.g. some raw material may be available on credit

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basis, all the expenses need not be paid immediately, workers are also to be paid periodically

etc. But still the amounts required to be invested in these current assets is always higher than

the funds available from current liabilities.

Financing of Working Capital :-

Financing of working
capital

Financing of Financing of Temporary,

permanent/fixed/or Long variable or short term
term working capital working capital

A) Financing of permanent/fixed/or Long term working capital:- Permanent

working capital should be financed in such a manner that the enterprise may have its

uninterrupted use for a sufficient long period.

There are five important sources of long term or permanent capital:

➢ Shares: The most important source for the permanent or long-term Working Capital

is the issue of equity, preference and deferred shares.

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 ➢ Debentures: Another important source for raising the permanent Working Capital is

the issue of debentures, which means a debt where the debenture holder is considered

as the creditor of the company.

➢ Retained Earnings: Otherwise called ploughing back of profits. It means the

reinvestment by the company’s surplus earnings in its business.

➢ Loans from Financial Institutions: Financial institutions such as Commercial

banks, Life Insurance Corporation of India, Industrial Finance Corporation of India,

State Finance Corporation, Industrial Development Bank of India, etc.,also provide

term loans for Working Capital needs.

➢ Public Deposits (Fixed): These deposits are fixed in nature and are accepted by a

business enterprise directly from the public.

B) Financing of Temporary, variable or short term working capital: The

main sources of short term working capital are as follows

➢ Indigenous Bankers: Private money lenders used to be the only source of finance

prior to the establishment of commercial banks. They used to charge very high rates

of interest.

➢ Trade credit: Trade credit refers to the credit extended by suppliers of goods in the

normal course of business. The credit worthiness of a firm and the confidence of its

suppliers are the main basis of securing trade credit.

➢ Installment credit: In this assets are purchased and possession of goods is taken

immediately but payment is made in installment over a predetermined period.

Generally, interest is charged on the unpaid price or it may be adjusted in the price.

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 ➢ Advances: Some business houses get advances from their customers and agents

against orders. Usually the manufacturing concerns having long production cycle

prefer to take advances from their customers.

➢ Factoring or Accounts Receivable Credit: A commercial bank may provide

finance by discounting bills or invoices of its customers. Thus, a firm gets immediate

payment for sale made on credit. A factor is a financial institution which offers

services related to management and financing of debts arising out of credit sales.

➢ Deferred Incomes: Deferred incomes are incomes received in advance before

supplying goods or services. However, firms having great demand for its products and

services, and those having good reputation in the market can demand deferred

incomes.

➢ Commercial Paper: Commercial paper represents unsecured promissory notes issued

by firms to raise short-term funds. But only large companies enjoying high credit

rating and sound financial health can issue commercial paper to raise short-term

funds. The Reserve Bank of India has laid down a number of conditions to determine

eligibility of a company for the issue of commercial paper. Only a company which is

listed on the. Stock exchange has a net worth of at least Rs. 10 corers and a maximum

permissible bank inance of Rs. 25 crores can issue commercial paper not exceeding

30 per cent of its working capital limit. The maturity period of commercial paper

mostly ranges from 91 to 180 days. It is sold at a discount from its face value and

redeemed at face value on its maturity.

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 Banking finance

Cash
Credit
Working
Capital Overdraft
Loan
Bank
Finance

Letter of
loans
Credit

Bills
Financing

• Cash Credit– Under this facility, the bank specifies a predetermined limit and the

borrower is allowed to withdraw funds from the bank up to that sanctioned credit limit

against a bond or other security. However, the borrower can not borrow the entire

sanctioned credit in lump sum; he can draw it periodically to the extent of his

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 requirements. Similarly, repayment can be made whenever desired during the period.

There is no commitment charge involved and interest is payable on the amount

actually utilized by the borrower and not on the sanctioned limit.

• Overdraft– Under this arrangement, the borrower is allowed to withdraw funds in

excess of the actual credit balance in his current account up to a certain specified limit

during a stipulated period against a security. Within the stipulated limits any number

of withdrawals is permitted by the bank. Overdraft facility is generally available

against the securities of life insurance policies, fixed deposits receipts, Government

securities, shares and debentures, etc. of the corporate sector. Interest is charged on

the amount actually withdrawn by the borrower, subject to some

minimum(commitment) charges.

• Loans– Under this system, the total amount of borrowing is credited to the current

account of the borrower or released to him in cash. The borrower has to pay interest

on the total amount of loan, irrespective of how much he draws. Loans are payable

either on demand or in periodical instalments. They can also be renewed from time to

time. As a form of financing, loans imply a financial discipline on the part of the

borrowers.

• Bills Financing– This facility enables a borrower to obtain credit from a bank against

its bills. The bank purchases or discounts the bills of exchange and promissory notes

of the borrower and credits the amount in his account after deducting discount. Under

this facility, the amount provided is covered by cash credit and overdraft limit. Before

purchasing or discounting the bills, the bank satisfies itself about the creditworthiness

of the drawer and genuineness of the bill.

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 • Letter of Credit– While the other forms of credit are direct forms of financing in

which the banks provide funds as well as bears the risk, letter of credit is an indirect

form of working capital financing in which banks assumes only the risk and the

supplier himself provide the funds. A letter of credit is the guarantee provided by the

buyer’s banker to the seller that in the case of default or failure of the buyer, the bank

shall make the payment to the seller. The bank opens letter of credit in favour of a

customer to facilitate his purchase of goods. This arrangement passes the risk of the

supplier to the bank. The customer pays bank charges for this facility to the bank.

• Working Capital Loan– Sometimes a borrower may require additional credit in

excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide

such credit through a Working Capital Demand Loan (WCDL) account or a separate

‘on–operable’ cash credit account. This arrangement is presently applicable to

borrowers having working capital requirement of Rs.10 crores or above. The

minimum period of WCDL keeps on changing. WCDL is granted for a fixed term on

maturity of which it has to be liquidated, renewed or rolled over. On such additional

credit, the borrower has to pay a higher rate of interest more than the normal rate of

interest.

SECURITY REQUIRED IN BANK FINANCE

Banks generally do not provide working capital finance without adequate security. The nature

and extent of security offered play an important role in influencing the decision of the bank to

advance working capital finance. The bank provides credit on the basis of following modes of

security:

• Hypothecation– Under this mode of security, the banks provide working capital

finance to the borrower against the security of movable property, generally

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 inventories. It is a charge against property for the amount of debt where neither

ownership nor possession is passed to the creditor. In the case of default the bank has

the legal right to sell the property to realise the amount of debt.

• Pledge– A pledge is bailment of goods as security for the repayment of a debt or

fulfilment of a promise. Under this mode, the possession of goods offered as security

passes into the hands of the bank. The bank can retain the possession of goods

pledged with it till the debt (principal amount) together with interest and other

expenses are repaid. . In case of non-payment of loan the bank may either; Sue the

borrower for the amount due; Sue for the sale of goods pledged; or After giving due

notice, sell the goods

• Lien– Lien means right of the lender to retain property belonging to the borrower

until he repays the debt. It can be of two types: (i) Particular lien and (ii) General lien.

Particular lien is a right to retain property until the claim associated with the property

is fully paid. On the other hand, General lien is applicable till all dues of the lender

are paid. Banks usually enjoy general lien.

• Mortgage– Mortgage is the transfer of a legal or equitable interest in a specific

immovable property for the payment of a debt. In case of mortgage, the possession of

the property may remain with the borrower, while the lender enjoys the full legal title.

The mortgage interest in the property is terminated as soon as the debt is paid.

Mortgages are taken as an additional security for working capital credit by banks.

• Charge- Where immovable property of one person is made security for the payment

of money to another and the transaction does not amount to mortgage, the latter

person is said to have a charge on the property and all the provisions of simple

mortgage will apply to such a charge. A charge may be created by the act of parties

orby the operation of law. It is only security for payment

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 Regulation of Bank Finance

Concerned about such a distortion in credit allocation, the Reserve Bank of India (RBI) has

been trying, particularly from the mid 1960s onwards, to bring a measure of discipline among

industrial borrowers and to redirect credit to the priority sectors of the economy. From time to

time, the RBI issues guidelines and directives relating to matters like the norms for inventory

and receivables, the maximum permissible bank finance, the form of assistance, the

information and reporting system, and the credit monitoring mechanism. The important

guidelines and directives have stemmed from the recommendations of various committees

such as the Dahiya Committee, the Tandon Committee, the Chore Committee, and the Mara

the Committee. However, in recent years, in the wake of financial liberalization, the RBI has

given freedom to the boards of individual banks in all matters relating to working capital

financing. From the mid-eighties onwards, special committees were set up by the RBI to

prescribe norms for several other industries and revise norms for some industries covered by

the Tandon Committee. Inventory and receivable norms: Recommendations regarding

inventory and receivable norms have been debated and criticized mostly. The committee

pointed out that the borrower should be allowed to hold only a reasonable level of current

assets, particularly inventory and receivables only the normal inventory, based on the

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production plan, lead time of supplies, economic ordering levels and reasonable factor of

safety, should be financed by the banker. Receivables which are in tune with the practices of

the borrower’s firm /industry should be financed. Lending Norms The recommendation of the

Tandon Committee regarding the “Lending norms” has far - reaching implications. The

lending norms have been suggested in view of the realization that the banker’s role as a

lender in only to supplement the borrower’s resources and not to meet his entire working

capitals needs. In the context of this approach, the committee has suggested three alternative

methods for working out the maximum permissible level of bank borrowings. Each

successive method reduces the involvement of short-term bank credit to finance the current

assets. Maximum Permissible Bank Finance: The Tandon Committee had suggested three

methods for determining the maximum permissible bank finance (MPBF).

❖ First Method: According to this method, the borrower will have to contribute a

minimum of 25% of the working capital gap from long-term funds, i.e., owned funds

and term borrowings. This will give a current ratio of 1:17:1.The term working capital

gap refers to the total of current assets less current liabilities other than bank

borrowings.

❖ Second Method: Under this method the borrower has to provide the minimum of

25% of the total current assets that will give a current ratio of 1.33:1.

❖ Third Method : In this method, the borrower’s contribution from long term funds

will be to the extent of the entire core current assets and a minimum of 25% of the

balance of the current assets.

The term core current assets refers to the absolute minimum level of investment in all current

assets which is required at all times to carry out minimum level of business activities.

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 ASSESSMENT OF WORKING CAPITAL

A unit needs working capital funds mainly to carry current assets required for its operations.

Proper assessment of funds required for working capital is essential not only in the interest of

the concerned unit but also in the national interest to use the scare credit according to

production requirements. Inadequate levels of working capital may result in under-utilization

of capacity and serious financial difficulties. Similarly excessive levels may lead to

unproductive use of credit and unnecessary interest Burdon on the unit. Proper assessment of

working capital requirement may be done as under

I. Norms for inventory and receivables: If the bank credit is to be linked with production

requirements, it is necessary to assess the requirements on the basis of certain norms. The

‘study group to frame guidelines to follow-up of bank credit’ (Tandon Study Group)

appointed by Reserve Bank of India had suggested the norms for inventory and receivables

regarding major industries on the basis of company finance studies made by Reserve Bank

process periods in the different industries, discussions with the industry experts and feed-

back received on the interim report. The norms suggested by Tandon Study Group are being

reviewed from time to time by the Committee of Direction constituted by the Reserve Bank

to keep a constant view on working capital requirements. The committee has representatives

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from a few banks and it generally once in a quarter. It also consults the representatives from

industry and trade. It keeps a watch on the various issues relating to working

II. Computation of Maximum Permissible Bank Finance (MPBF): The Tandon Study

group had suggested the following alternatives for working out the maximum permissible

bank finance:- a. Bank can work out the working capital gap. i. e. total current assets less

current liabilities other than bank borrowings and finance a maximum of 75 per cent of the

gap; the balance to come out of long-term funds, i.e. owned funds and term borrowings b.

Borrower should provide for a minimum of 25 per cent of total current assets out of long-

term funds, i.e. owned funds and long term borrowings. A certain level of credit for

purchases and other current liabilities inclusive of bank borrowings will not exceed 75 per

cent of current assets.

III. Classification of current assets & Current liabilities: In order to calculate net working

capital & maximum permissible bank finance, it is necessary to have proper classification of

various items of current assets & current liabilities. All illustrative lists of current assets &

current liabilities for the purpose of assessment of working capital are furnished below;

Current assets: -

a. Cash and bank balances

b. Investments

c. Receivables arising out of sales other than deferred receivables (including bills purchased

& discounted by bankers)

d. Installments by deferred receivables due within one year

e. Raw materials & components used in the process of manufactured including those in

transit f. Stock in process including semi finished goods

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f. Finished goods including goods in transit

g. Other consumable spares

h. Advance payment for tax

i. Prepaid expenses

j. Advances for purchases of raw materials, components & consumable stores

Current Liabilities:

a. Short-term borrowings (including bills purchased & discounted) from Banks and

ii. Others b. Unsecured loans

c. Public deposits maturing within one year

d. Sundry creditors (trade) for raw material & consumer stores & spares

e. Interest & other charges accrued but no due for payments

f. Advances/progress payments from customers

g. Deposits from dealers selling agents, etc.

h. Statutory liabilities

• Provident fund dues

• Provision for taxation

• Sales-tax, excise, etc.

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 • Obligation towards workers considered as statutory

i. Miscellaneous current liabilities

• Dividends

• Liabilities for expenses

• Gratuity payable within one year

• Any other payments due within one year

THREE TYPES OF WORKING CAPITAL POLICIES

Based on the attitude of the finance manager towards risk, profitability and liquidity, the

working capital policies can be divided into following three types.

1. RESTRICTED POLICY

In restricted policy, the estimation of current assets for achieving targeted revenue is

done very aggressively without considering for any contingencies and provisions for

any unforeseen event. After deciding, these policies are forcefully implemented in the

organization without tolerating any deviations. In the diagram, point R represents the

restricted policy which attains the same level of revenues with lowest current

assets.Adopting this policy would result in an advantage of the lower working capital

requirement due to the lower level of current assets. This saves the interest cost to the

company and which in turn produces higher profitability i.e. higher return (ROI). On

the other hand, there is the disadvantage i the form of high risk due to very aggressive

policy. That is why; it is also called as aggressive working capital policy.

2. RELAXED POLICY

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 Relaxed policy is just the opposite of restricted policy. In this policy, the estimation of

current assets for achieving the targeted revenue is prepared after careful

consideration of uncertain events such as seasonal fluctuations, a sudden change in

the level of activities or sales etc. After the reasonable estimates also, a cushion to

avoid any unforeseen circumstances is left to avoid the maximum possible risk. In the

diagram, it represents the point Rx which uses the highest level of current assets for

achieving the same level of sales.

The companies having relaxed working capital policies assume an advantage of

almost no risk or low risk. This policy guarantees the entrepreneur of the smooth

functioning of the operating cycle. We know that earnings are more important than

higher earnings. On the other hand, there is a disadvantage of lower return on

investment because higher investment in the current assets attracts higher interest cost

which in turn reduces profitability. Because of its conservative nature, this policy is

also called as conservative working capital policy.

3. MODERATE POLICY

Moderate policy is a balance between the two policies i.e. restricted and relaxed. It

assumes characteristics of the both the policies. To strike a balance, moderate policy

assumes risk which is lower than restricted and higher than conservative. In

profitability front also, it lies between the two.

The biggest benefit of this policy is that it has reasonable assurance of smooth

operation of working operating capital cycle with moderate profitability. Working

capital policies can be further framed for each component of networking capital. cash,

accounts receivable, inventory and accounts payable. Cash policies can be to maintain

an appropriate level of cash. When the level is high, it should be invested in liquid

investments for short term and vice versa. Accounts receivable policy may state about

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 payment terms, credit period, credit limit, etc. Inventory policy may speak of

minimizing the levels of inventory till the point it poses any risk to the satisfaction of

customer demands. Accounts payable policies include policies of payment terms,

quality terms, return policies, etc.

How to Determine Your Working Capital Needs

Working capital is one of the most difficult financial concepts for the small-business owner to

understand. In fact, the term means a lot of different things to a lot of different people. By

definition, working capital is the amount by which current assets exceed current liabilities.

However, if you simply run this calculation each period to try to analyze working capital, you

won't accomplish much in figuring out what your working capital needs are and how to meet

them.

A more useful tool for determining your working capital needs is the operating cycle. The

operating cycle analyses the accounts receivable, inventory and accounts payable cycles in

terms of days. In other words, accounts receivable are analyzed by the average number of

days it takes to collect an account. Inventory is analyzed by the average number of days it

takes to turn over the sale of a product (from the point it comes in your door to the point it is

converted to cash or an account receivable). Accounts payable are analyzed by the average

number of days it takes to pay a supplier invoice.

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Most businesses cannot finance the operating cycle (accounts receivable days + inventory

days) with accounts payable financing alone. Consequently, working capital financing is

needed. This shortfall is typically covered by the net profits generated internally or by

externally borrowed funds or by a combination of the two.

Most businesses need short-term working capital at some point in their operations. For

instance, retailers must find working capital to fund seasonal inventory build-up between

September and November for Christmas sales. But even a business that is not seasonal

occasionally experiences peak months when orders are unusually high. This creates a need

for working capital to fund the resulting inventory and accounts receivable build-up.

Some small businesses have enough cash reserves to fund seasonal working capital needs.

However, this is very rare for a new business. If your new venture experiences a need for

short-term working capital during its first few years of operation, you will have several

potential sources of funding. The important thing is to plan ahead. If you get caught off

guard, you might miss out on the one big order that could put your business over the hump.

Here are the five most common sources of short-term working capital financing:

1. Equity. If your business is in its first year of operation and has not yet become

profitable, then you might have to rely on equity funds for short-term working capital

needs. These funds might be injected from your own personal resources or from a

family member, a friend or a third-party investor.

2. Trade creditors. If you have a particularly good relationship established with your

trade creditors, you might be able to solicit their help in providing short-term working

capital. If you have paid on time in the past, a trade creditor may be willing to extend

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 terms to enable you to meet a big order. For instance, if you receive a big order that

you can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from

your supplier if 30-day terms are normally given. The trade creditor will want proof

of the order and may want to file a lien on it as security, but if it enables you to

proceed, that should not be a problem.

3. Factoring. Factoring is another resource for short-term working capital financing.

Once you have filled an order, a factoring company buys your account receivable and

then handles the collection. This type of financing is more expensive than

conventional bank financing but is often used by new businesses.

4. Line of credit. Lines of credit are not often given by banks to new businesses.

However, if your new business is well-capitalized by equity and you have good

collateral, your business might qualify for one. A line of credit allows you to borrow

funds for short-term needs when they arise. The funds are repaid once you collect the

accounts receivable that resulted from the short-term sales peak. Lines of credit

typically are made for one year at a time and are expected to be paid off for 30 to 60

consecutive days sometime during the year to ensure that the funds are used for short-

term needs only.

5. Short-term loan. While your new business may not qualify for a line of credit from a

bank, you might have success in obtaining a one-time short-term loan (less than a

year) to finance your temporary working capital needs. If you have established a good

banking relationship with a banker, he or she might be willing to provide a short-term

note for one order or for a seasonal inventory and/or accounts receivable build-up.

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In addition to analysing the average number of days it takes to make a product (inventory

days) and collect on an account (accounts receivable days) vs. the number of days financed

by accounts payable, the operating cycle analysis provides one other important analysis.

You can see that working capital has a direct impact on cash flow in a business. Since cash

flow is the name of the game for all business owners, a good understanding of working

capital is imperative to making any venture successful.

CHAPTER 4:-FINDING AND SUGGESTION

➢ Making available just adequate quantum of working capital. Some of the existing

machinery is new with absolute equipment requiring modernization and rebuilding.

➢ The company should administrate their credit on the basis of certain well recognized

and established principle of credit administration.

➢ The company should maintain an optimum level of cash in the business in order to

maintain a proper liquidity in the business.

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 CHAPTER 5:- CONCLUSION

The requirement of working capital finance is ever increasing loans and

advanced formed a major portion of the current assets of the firm because of

which the working capital gap is larges. From the above discussion we can say

that bank credit occupies an important place in financing working capital

requirements of industries.

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