hitesh working capital
Post on 07-Jul-2018
222 Views
Preview:
TRANSCRIPT
-
8/19/2019 Hitesh Working Capital
1/52
INTRODUCTION
Financial Management is that managerial activity which is concerned with the planning
and controlling of the firm’s financial resources.
Financial management focuses on finance manager performing various tasks as
Budgeting, Financial Forecasting, Cash Management, Credit Administration, Investment
Analysis, Funds Management, etc. which help in the process of decision making.
Financial management includes management of assets and liailities in the long run and
the short run.
!he management of fi"ed and current assets, however, differs in three important ways#
Firstly, in managing fi"ed assets, time is very important$ conse%uently discounting and
compounding aspects of time element play an important role in capital udgeting and a minor
one in the management of current assets. &econdly, the large holdings of current assets,
especially cash, strengthen firm’s li%uidity position ut it also reduces its overall profitaility.
!hirdly, the level of fi"ed as well as current assets depends upon the e"pected sales, ut it is only
the current assets, which can e ad'usted with sales fluctuation in the short run.
(ere, we will e focusing mainly on management of current assets and current liailities.
)very usiness needs funds for two purposes for its estalishment and to carry out its
day* to*day operations. +ong terms funds are re%uired to create production facilities through purchase of fi"ed assets such as plant and machinery, land, uilding, furniture, etc.
Investments in these assets represent that part of firm’s capital which is locked on
permanent or fi"ed asis and is called fi"ed capital.
Funds are also needed for short*term purposes for the purchase of raw material, payment
of wages and other day to* day e"penses etc. !hese funds are known as working capital.
In simple words, working capital refers to that part of the firm’s capital which is re%uired
for financing short* term or current assets such as cash, marketale securities, detors -
inventories. Funds, thus, invested in current assets keep revolving fast and are eing constantly
converted in to cash and this cash flow out again in e"change for other current assets. (ence, it is
also known as revolving or circulating capital or short term capital.
-
8/19/2019 Hitesh Working Capital
2/52
Components of /orking Capital#*
!he asic components of working capital are#*
Current assets#*
a Inventoriesi 0aw Materials and Components
ii /ork in 1rogress
iii Finished 2oods
iv 3thers
!rade 4etors
c +oans And Advances
d Investments
e Cash And Bank Balance
Current +iailities#
a &undry Creditors
!rade Advances
c Borrowings
d Commercial Banks
e 1rovisions
5
-
8/19/2019 Hitesh Working Capital
3/52
LITERATURE REVIEW
Purpose:-
!he purpose of this paper is to review research on working capital management6/CM7 and to identify gaps in the current ody of knowledge, which 'ustify future research
directions. /CM has attracted serious research attention in the recent past, especially after the
financial crisis of 5889.
i!"i!#s:-
4etailed content analysis reveals that most of the research work is empirical and
focuses mainly on two aspects, impact of working capital on profitaility of firm and working
capital practices. Ma'or research work has concluded that /CM is essential for corporate
profitaility. !he ma'or issues with prior literature are lack of survey*ased approach and lack of
systematic theory development study, which opens all new areas for future research. !he future
research directions proposed in this paper may help develop a greater understanding of
determinants and practices of /CM.
Practical implicatio!s:-
!ill date, literature on classification of /CM has een almost non*
e"istent. !his paper reviews a large numer of articles on /CM and provides a classification
scheme in to various categories. &use%uently, various emerging trends in the field of /CM are
identified to help researchers specifying gaps in the literature and direct research efforts.
Ori#i!alit$%&alue:-
!his paper contains a comprehensive listing of pulications on the /CM and
their classification according to various attriutes. !he paper will e useful to researchers,
finance professionals and others concerned with /CM to understand the importance of /CM.
!o the est of the authors’ knowledge, no detailed &+0 on this topic has previously een
pulished in academic 'ournals.
:
-
8/19/2019 Hitesh Working Capital
4/52
T'PE( O WOR)IN* CAPITAL:-
!here are road two categories under which we will learn the concept of working capital.
. Balance sheet concept
5. 3perating Cycle concept
Balance sheet Concept has recogni;ed working capital as
a. 2ross /orking Capital
. *and
?
-
8/19/2019 Hitesh Working Capital
5/52
our current liailities that means trade creditors, outstanding e"penses they all shall form part of
current liailities assume them to e 0s. @8>*the working capital will come out to e
Wor+i!# capital curre!t Assets curre!t lia.ilities
88 @8
:8
This is the /ormula .$ 0hich 0e ca! assess the !et 0or+i!# capital o/ the or#a!i1atio!2
-
8/19/2019 Hitesh Working Capital
6/52
CONCEPT O WOR)IN* CAPITAL
/orking Capital Management is the process of pla!!i!# and co!trolli!# the level and
mi" of current assets of the firm as well as financing these assets. &pecifically, /orking Capital
Management re%uires financial managers to decide what %uantities of cash, other li%uid assets,
accounts receivales and inventories the firm will hold at any point of time.
/orking capital is the capital you re%uire for the working i.e. functioning of your usiness in the
short run.
*ross 0or+i!# capital refers to the firm’s investment in the current assets and includes cash,
short term securities, detors, ills receivales and inventories.
It is necessary to concentrate on the fact that the investment in the current assets should e
neither e"cessive nor inade%uate.
/C re%uirement of a firm keeps changing with the change in the usiness activity and hence the
firm must e in a position to strike a alance etween them. !he financial manager should know
where to source the funds from, in case the need arise and where to invest in case of e"cess
funds.
Net 0or+i!# capital refers to the difference etween the current assets and the current liailities.
Current liailities are those claims of outsiders, which are e"pected to mature for payment within
an accounting year and include creditors, ills payale, ank overdraft and outstanding e"penses./hen current assets e"ceed current liailities it is called Positi&e WC and when current
liailities e"ceed current assets it is called Ne#ati&e WC2
!he
-
8/19/2019 Hitesh Working Capital
7/52
concept also covers the %uestion of 'udicious mi" of long term and short*term funds for financing
the current assets.
NEED AND I5PORTANCE O WOR)IN* CAPITAL 5ANA*E5ENT
!he importa!ce of working capital management stems from the following reasons#
. Investment in current assets represents a sustantial portion of the total investment.
5. Investments in current asset and the level of current liailities have to e geared %uickly
to change in sales, which helps to e"pand volume of usiness.
:. 2ives a company the aility to meet its current liailities
?. !ake advantage of financial opportunities as they arise.
ACTOR( INLUENCIN* T6E WOR)IN* CAPITAL RE7UIRE5ENT
All firms do not have the same /C needs .!he following are the factors that affect the /C
needs#
. Nature a!" si1e o/ .usi!ess: !he /C re%uirement of a firm is closely related to the
nature of the usiness. /e can say that trading and financial firms have very less investment
in fi"ed assets ut re%uire a large sum of money to e invested in /C. 3n the other hand
0etail stores, for e"ample, have to carry large stock of variety of goods little investment in
the fi"ed assets.
Also a firm with a large scale of operations will oviously re%uire more /C than the smaller
firm.
5. 5a!u/acturi!# c$cle: It starts with the purchase and use of raw materials and completes
with the production of finished goods. +onger the manufacturing cycle larger will e the /C
re%uirement$ this is seen mostly in the industrial products.
:. 8usi!ess /luctuatio!: /hen there is an upward swing in the economy, sales will increase
also the firm’s investment in inventories and ook dets will also increase, thus it will
increase the /C re%uirement of the firm and vice*versa.
?. Pro"uctio! polic$: !o maintain an efficient level of production the firm’s may resort to
normal production even during the slack season. !his will lead to e"cess production and
@
-
8/19/2019 Hitesh Working Capital
8/52
hence the funds will e locked in form of inventories for a long time, hence provisions
should e made accordingly. &ince the cost and risk of maintaining a constant production is
high during the slack season some firm’s may resort to producing various products to solve
their capital prolems. If they do not, then they re%uire high /C.
. irm9s Cre"it Polic$: If the firm has a lieral credit policy its funds will remain locked
for a long time in form of detors and vice*versa.
-
8/19/2019 Hitesh Working Capital
9/52
OPERATIN* C'CLE
0A/
D
CA&(
BI++&0)C)EIAB+
0A/ MA!)0IA+
0A/ MA!)0IA+ /30 I
-
8/19/2019 Hitesh Working Capital
10/52
Perma!e!t a!" &aria.le 0or+i!# capital:
!he minimum level of current assets re%uired is referred to as permanent working capital and
the e"tra working capital needed to adapt to changing production and sales activity is called
temporary working capital.
8
-
8/19/2019 Hitesh Working Capital
11/52
RE(EARC6 5ET6ODOLO*'
(TATE5ENT O O8
-
8/19/2019 Hitesh Working Capital
12/52
!he information from annual reports is insufficient to calculate few ratios.
+imited time does not allowed to do more analysis.
PERIOD O T6E (TUD':-
!he period of the study was four months from Ganuary to April 5889, 4uring the period
all the re%uired data was collected through secondary sources and analy;ed with the help of
financial tools of analysis. It includes data collection analysis of data and interpretation.
TOOL( APPLIED IN T6E (TUD':-
/orking capital ratios
+i%uidity ranking
3perating cycle
Analysis of current assets and current liailities.
5ET6ODOLO*':-
!he o'ective of the study is to analy;e the working capital position of the company for
the past five years from and to achieve those o'ective the following methodology was adopted.
Firstly to find out li%uidity and solvency position of the company through working capital
ratios.
&econdly to study the +i%uidity position of the company y using li%uidity ranking
method.
!hirdly to estimate the working capital re%uirement of the company y using 3perating
cycle.
Finally Analysis of current assets and current liailities.
LI5ITATAION( O T6E (TUD':-
!he analysis was confined to a period of five years during
5 Financial statement of prepare on the asis of certain accounting concepts in conventions
any change in methods are procedures of accounting will limit the utility of financial
statements.
5
-
8/19/2019 Hitesh Working Capital
13/52
ROLE O INANCIAL 5ANA*ER IN WOR)IN* CAPITAL 5ANA*E5ENT
/orking capital management re%uires must of the finance manager time as it
represent a large position of investment is assets
5 /orking capital management re%uires much of the finance management time as it
represent larger position of investment in assets.
: Action should e taken to curtail unnecessary investment in current assets.
? All precaution should e taken for the effective and efficient management of
working capital.
+arger firms have to manage their current assets and current liailities very
carefully and should see that the work should e done properly in order to achieve
predetermined organi;ational goals.
:
-
8/19/2019 Hitesh Working Capital
14/52
INANCIN* CURRENT A((ET(
LEVEL O CURRENT A((ET( RE7UIRED
An important /C policy decision is concerned with the level of investment in current
assets. Hnder a /le4i.le polic$ or co!ser&ati&e polic$ the investments in current assets is high.
!his means that the firm maintains a huge alance of cash and marketale securities carries a
large amount of inventories and grants generous amount of credit to customers, which leads to
high level of detors.
Hnder a restricti&e polic$ or a##ressi&e polic$ the investment in current assets is low.
4etermining the optimum level of current assets involves a tradeoff etween costs that rise
and fall with current assets. !he former are referred as carr$i!# costs and the latter as shorta#ecosts. Carrying costs are mainly in the nature of cost of financing a higher level of current assets.
&hortage costs are mainly in the form of disruption in production schedule, loss of sale, and loss
of customer goodwill, etc.
-
8/19/2019 Hitesh Working Capital
15/52
CURRENT A((ET( INANCIN* POLIC'
After estalishing the level of current assets, we further need to decide what mi" of long*term
capital and short*term det should the firm employ to support it current assets. !hree kind of
financing can e distinguished$ lo!# term /i!a!ci!#, short term /i!a!ci!# a!" spo!ta!eous
/i!a!ci!#2
&ources of long term financing are shares, deentures, preference share, retained earnings
and det from financial institution, sources of short term finance include ank loans, commercial
papers and factoring receivales, whereas, spontaneous source of finance refers to the automatic
sources of short term funds like creditors, ills payale and other outstanding e"penses.
!he firms to finance its /C re%uirements may use one of the following three strategies#
(trate#$ A# 3nly long*term sources are used to finance its entire /C re%uirements.
/hen the /C re%uirements are less then the peak level the alance is invested in li%uid
assets like cash and marketale securities.
(owever it leads to inefficient management of funds as you may have to pay
high interest or you could invest it in other places where you could earn good returns.
(trate#$ 8# +ong*term financing is used to meet the fi"ed asset re%uirements,
permanent /C re%uirement and a portion of fluctuating /C re%uirement. 4uring
seasonal upswings, short* term financing is used, during seasonal down swings surplus is
invested in li%uid assets. !his is also called the co!ser&ati&e approach2
!his is the middle route, where at least you know that you normally wouldn’t
fall short of /C. (owever you could still make etter use of your funds.
-
8/19/2019 Hitesh Working Capital
16/52
(trate#$ C# +ong*term financing is used to meet the fi"ed asset re%uirements
and permanent /C re%uirement while short term
financing is used to finance the fluctuating
needs.
!his is a little riskier strategy, as you may
not always e ale to arrange for /C finance as and
when you need and hence may cause a considerale loss in terms of money,
reputation, etc.
Hnder the a##ressi&e approach, the firm finances a part of its permanent current assets with
short term financing. &ometimes they may even finance a part of their fi"ed assets with short*
term sources.
5atchi!# Approach % 6e"#i!# Approach: It involves
matching the e"pected life of assets with the e"pected life of
the source of funds raised to finance assets e"# a ten year loan may
e used to finance machinery with an e"pected life of ten
years.
Hsing long*term finance for short*term assets is e"pensive,
as the funds will not e fully utili;ed. &imilarly, financing long term assets with short term
financing is costly as well as inconvenient as arrangement for the new short term financing will
have to e made on a continuing asis. (owever, it should e noted that e"act matching is not
possile ecause of the uncertainty aout the e"pected life of assets.
CO(T O INANCIN*:
In developed countries it has een oserved that the rate of interest is related to the maturity of
the det. !his relationship etween the maturity of det and its cost is called the term structure
o/ i!terest rates. !he curve related to it is called the $iel" cur&e, which is generally upward
sloping. +onger the maturity period, higher is the rate of interest.
-
8/19/2019 Hitesh Working Capital
17/52
!he li3ui"it$ pre/ere!ce theor$ 'ustifies the high rate of interest on det with longmaturity period.
-
8/19/2019 Hitesh Working Capital
18/52
Cash alance is maintained for transaction purposes and an additional amount may e
maintained as a uffer or safety stock. It involves a tradeoff etween the costs and the risk.
If a firm maintains a small cash alance, it has to sell its marketale securities and
proaly uy them later more often, than if it holds a large cash alance. More the numer of
transactions more will e the trading cost and vice*versa$ also, lesser the cash alance, less will
e the numer of transaction and vice*versa. (owever the opportunity cost of maintaining the
cash rises, as the cash alance increases.
W6' DOE( A IR5 NEED CA(6>
i. Tra!sactio! moti&e: firm needs cash for transaction purpose.
ii. Precautio!ar$ moti&e: !he magnitude and time of cash inflows and outflows is
always uncertain and hence the firms need to have some cash alances as a uffer.
9
-
8/19/2019 Hitesh Working Capital
19/52
iii. (peculati&e moti&e: All firms want to make profits from fluctuations in commodity
prices, security prices, interest rates and foreign e"change rates .A cash rich firm is in a
etter position to e"ploit such argains. (ence, the firm with such speculative leanings
may carry additional li%uidity.
!he firm must decide the 3ua!tum o/ tra!sactio!s a!" precautio!ar$ .ala!ces to e held,
which depends upon the following factors#
!he e"pected cash inflows and outflows ased on the cash udget and
forecasts, encompassing long>short range cash needs of the firm.
!he degree of deviation etween the e"pected and actual net cash flow.
!he maturity structure of the firm’s liailities.
!he firm’s aility to orrow at a short notice, in case of emergency.
!he philosophy of management regarding li%uidity and risk of insolvency
!he efficient planning and control of cash.
CA(6 PLANNIN*
Cash planning is a techni%ue to plan for and control the use of cash. !he forecast may e ased
on the present operations or the anticipated future operations.
-
8/19/2019 Hitesh Working Capital
20/52
CA(6 ORECA(TIN* AND 8UD*ETIN*:
A cash .u"#et is a summar$ stateme!t o/ the /irms e4pecte" cash i!/lo0s a!" out/lo0s o&er
a pro=ecte" time perio"2It helps the financial manager to determine the future cash needs, to arrange for it and to
maintain a control over the cash and li%uidity of the firm. If the cash flows are stale, udgets
can e prepared monthly or %uarterly, if they are unstale they can e prepared daily or weekly.
Cash udgets are helpful in#
)stimating cash re%uirements
1lanning short term financing
&cheduling payments in connection with capital e"penditure
1lanning purchases of materials
4eveloping credit policies
Checking the accuracy of long* term forecasts.
(hort Term orecasti!# 5etho"s
!wo most commonly used methods of short* term forecasting are#
i. !he receipt and payment method!he ad'usted net income method
!he receipt and payment method is used for forecasting limited periods, like a week or a month,
whereas, the ad'usted net income method is used for longer durations. !he cash flows can e
compared with udgeted income and e"pense items if the receipts and payment approach is
followed. 3n the other hand the ad'usted net income method is appropriate in showing the
company’s working capital and future financing needs.
58
-
8/19/2019 Hitesh Working Capital
21/52
O8(ERVATION( RE*ARDIN* WOR)IN* CAPITAL 5ANA*E5ENT IN
(5ALL (CALE INDU(TRIE(
&ince it was a matter relating to finance, not everyody revealed all the aspects of working capital management. (owever an effort was put in to get the ma"imum out of them .!he
following conclusion can e made on the asis of information gathered#
Most of them are not very professionally managed and hence they are really not aware of
their working capital policy as to whether it is a##ressi&e or co!ser&ati&e. Basically they are not
very conscious aout it. (owever now they have started reali;ing the importance of cost of
money and have started planning their cash.
Cash ma!a#eme!t:
!hey are facing prolems managing their cash as their cash is mainly stuck in "e.ts a!"
i!&e!tor$, to overcome this they try and discount the ill with the ank as soon as possile, deal
only on cash asis and keep the credit period to the minimum.
Recei&a.les ma!a#eme!t:
!hey try to match the credit they get with the credit period they give, for efficient
management, as is in the case of 2irnar packaging. 6Matching approach7
4etors take unusually long time to repay and hence most of their funds are locked in
there. !hey need efficient receivale management system. &ince they are &&I’s it is
practically difficult for them to have contract for payment period over which they can
charge interest, also there is more personal relation with their customers and they
normally wouldn’t take immediate action if the payment is not made on time.
5
-
8/19/2019 Hitesh Working Capital
22/52
I!&e!tor$ ma!a#eme!t:
!hough most of them are not very professionally managed, some of them are now
practicing GI! and are aware of the )3 concept. !hey have reali;ed the need to reduce
lockage of funds in inventory and are working towards it.
!rying to reduce the lead time and servicing the orders as fast as possile is the only
way out for them.
i!a!ci!# /or WC:
!heir main source of their cash has een ank loans. Many of them have taken ank
loans at very high interest rates. At times they give 588J collateral as is in the case of
&hivam packaging. !hus they are paying a high cost of cash and hence need etter cash
management.
Many of them take cash credit to finance their fluctuating /C needs
Cash credit limit is fi"ed on the asis of sundry detors and stock hypothecated. (ence
collateral is very important for otaining ank loans.
3taining ank finance is not only aout past performance and future pro'ections ut
also aout developing trust*ased relationship with the ankers. !his makes otaining
loans easier.
55
-
8/19/2019 Hitesh Working Capital
23/52
INVE(T5ENT O (URPLU( UND(
INVE(T5ENT IN 5AR)ETA8LE (ECURITIE(
!he e"cess amount of cash held y the firm to meet its variale cash re%uirements and
future contingencies should e temporarily invested in marketale securities for ear!i!#
retur!s. In choosing among the alternative securities the firm should e"amine three asic
features of security#
(a/et$: !he firm has to invest in a security, which has a low default risk. (owever
it should e noted that, higher the default risk, higher the return on security and vice*
versa.
5aturit$: Maturity refers to the time period over which interest and principle are
to e paid. !he price of long*term securities fluctuates more widely with the change
in interest rates, then the price of short*term security. 3ver a period of time interest
rates have a tendency to change, and hence, long*term securities are considered to e
riskier, thus less preferred.
5ar+eta.ilit$: If the security can e sold %uickly and at a high price it is
considered to e a highly li%uid or marketale. &ince the firm would need the
invested money in near future for meeting its /C re%uirements, it would invest in
security, which is readily marketale.
-
8/19/2019 Hitesh Working Capital
24/52
T'PE O 5AR)ETA8LE (ECURITIE(
!he choice in this case is restricted to the govt. treasury ills and commercial ank deposits.
!reasury ills# It represents short*term oligations of govt. that have maturities
like D days, 95 days and :? days. !hey are instead sold at a discount and
redeemed at par value. !hough the return on them is low they appeal for the
following reasons#
i. Can e transacted easily as they are issued in earer form.
ii. !here is a very active secondary market for treasury ills and the 4iscount
and Finance (ouse of India is a ma'or market maker.
iii. !hey are virtually risk* free.
Commercial ank deposits# !he firm can deposit its e"cess cash with
commercial anks for a fi"ed interest rate, which further depends on the period of
maturity. +onger the period, higher the rate .It is the safest short run investment
option for the investors. If the firm wishes to withdraw its funds efore maturities, it
will lose on some interest.
OT6ER OPTION( OR INVE(TIN* (URPLU( UND(
Rea"$ or0ar"s: A commercial ank or some other organi;ation may do a
ready forward deal with a firm interested in deploying surplus funds on short*
term asis. (ere, the ank sells and repurchases the same securities 6this means
that the company, in turn, uys and sells securities7 at prices determined efore
hand. (ence, the name ready forward. !he return in ready forward deal is closely
5?
-
8/19/2019 Hitesh Working Capital
25/52
linked to money market conditions, which is tight during the peak season as well
as the time of year closing.
Commercial paper: It represents short term unsecured promissory notes
issued y firms that are generally considered to e financially strong .It has a
maturity period of D8 or 98 days. It is sold at a discount and redeemed at par. It is
either directly placed with the investor or sold through dealers. Its main enefit is
that it offers high interest rate, while its main drawack is that it does not have a
developed secondary market.
I!ter-corporate "eposits: A deposit made y a company with another,
normally up to a period of si" months is referred to as an inter*corporate deposit.
!hey are usually of three types#
i. Call deposits# It is withdraw ale y lender on giving a day’s notice.
(owever in practice, the lender has to wait for at least three days.
ii. !hree*month deposits# !hese deposits are taken y the orrowers to tide
over a short*term inade%uacy.
iii. &i"* month deposits#
-
8/19/2019 Hitesh Working Capital
26/52
5. !he total lending of a company cannot e"ceed @;? of its net
worth without the prior approval of the central govt. and a special
resolution permitting such e"cess lending.
8ill "iscou!ti!#: A company may also deploy its surplus funds to
discount>purchase the ills the way a ank does. As ills are self*li%uidating
instruments, ill discounting may e considered superior to lending in the inter*
corporate deposit market. /hile participating in ill discounting a company should#
i. )nsure that the ills are trade ills
ii. !ry to go for ills acked y letter of credit rather than open ills as
the former are more secure ecause of the guarantee provided y the
uyer’s ank.
5
-
8/19/2019 Hitesh Working Capital
27/52
5ANA*E5ENT O DE8TOR(
Cash flow can e significantly enhanced if the amounts owing to a usiness are collected
faster. &low payment has a crippling effect on usiness, in particular on small usinesses that can
least afford it. I/ $ou "o!t ma!a#e "e.tors, the$ 0ill .e#i! to ma!a#e $our .usi!ess as you
will gradually lose control due to reduced cash flow and, of course, you could e"perience an
increased incidence of ad det.
!he following measures will help manage your detors#
Make sure that the control of credit gets the priority it deserves.
)stalish clear credit practices as a matter of company policy.
Make sure that these practices are clearly understood y staff, suppliers and customers.
Be pro/essio!al when accepting new accounts, and especially larger ones.
Check out each customer thoroughly efore you offer credit. Hse credit agencies, ank
references, industry sources etc.
)stalish cre"it limits for each customer... and stick to them.
Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
eep very close to your lar#er customers.
5@
-
8/19/2019 Hitesh Working Capital
28/52
Invoice promptly and clearly.
Consider charging penalties on overdue accounts.
Consider accepting cre"it %"e.it car"s as a payment option.
Monitor your detor alances and ageing schedules, and donLt let any dets get too
large or too old.
4etors due o&er B; "a$s unless within agreed credit terms should generally demand immediate
attention.
A customer 0ho "oes !ot pa$ is !ot a customer . (ere are a few ideas that may help you incollecting money from detors#
4evelop appropriate procedures for handling late payments.
!rack and pursue late payers.
2et e"ternal help if your own efforts fail. .
In difficult circumstances, take what you can now and agree terms for the remainder. It
lessens the prolem.
/hen asking for your money, e har" o! the issue - .ut so/t o! the perso!2 4onLt
give the detor any e"cuses for not paying.
*oal O/ Cre"it 5a!a#eme!t
!o manage the credit in such a way that sales are e"panded to an e"tent to which the risk
remains within an acceptale limit. (ence for ma"imi;ing the value, the firm should manage its
credit to#
59
-
8/19/2019 Hitesh Working Capital
29/52
O.tai! optimum !ot ma4imum &alue o/ sales2
Co!trol the cost o/ cre"it a!" +eep it at mi!imum2
5ai!tai! i!&estme!t i! "e.tors at optimum le&el2
INANCE IN WOR)IN* CAPITAL
After determining the level of /orking Capital, the firm has to decide how it is to e financed.
!he need for finance arises mainly ecause the investment in working capital>current assets, that
is, raw material, work*in*progress, finished goods and receivales typically fluctuates during the
year. Although long*term funds partly finance current assets and provide the margin money for
working capital, such working capitals are virtually e"clusively supported y short term sources.
!he main sources of working capital financing are namely, !rade credits, Bank credits andcommercial ankers.
2 Tra"e Cre"it
5D
-
8/19/2019 Hitesh Working Capital
30/52
!rade credit refers to the credit e"tended y the supplier of goods and services in the normal
course of usiness of the firm. According to trade practices, cash is not paid immediately for
purchases ut after an agreed period of time. !hus, trade credit represents a source of finance for
credit purchases.
!here is no formal>specific negotiation for trade credit. It is an informal agreement etween the
uyer and the seller. &uch credit appears in the ooks of uyer as sundry creditors>accounts
payale. !he most of the trade credit is on open account as accounts payale, the supplier of
goods does not e"tend credits indiscriminately. !heir decision as well as the %uantum is ased on
a consideration of factors such as earnings record over a period of time, li%uidity position of the
firm and past record of payment.
A"&a!ta#es
i It is easily, almost automatically availale.
ii It is fle"ile and spontaneous source of finance.
iii !he availaility and the magnitude of trade credit is related to the si;e of operation of the
firm in terms of sales>purchases.
iv It is also an informal, spontaneous source of finance.
v !rade credit is free from restrictions associated with formal>negotiated source of
finance>credit.
8a!+ Cre"it
Bank credit is primarily institutional source of working capital finance in India. In fact, it
represents the most important source for financing of current assets. /orking Capital finance is
provided y anks in five ways#
a Cash Cre"it % O&er"ra/ts: Hnder cash credit> overdraft agreement of ank
finance, the ank specifies a predetermine orrowing>credit limit. !he urrower can orrow up to the stipulated credit. /ithin the specified limit, any numer of
drawings is possile to the e"tent of his re%uirements periodically. &imilarly,
repayment can e made whenever desired during the period. !he interest is
determined on the asis of the running alance>amount actually utili;ed y the
urrower and not on the sanctioned limit. (owever, a minimum charge may e
:8
-
8/19/2019 Hitesh Working Capital
31/52
payale on the unutili;ed alance irrespective of the level of orrowing for
availing of the facility. !his type of financing is highly attractive to the urrowers
ecause, firstly, it is fle"ile in that although orrowed funds are repayale on
demand, and, secondly, the urrower has the freedom to draw the amount in
advance as a when re%uired while the interest liaility is only on the amount
actually outstanding. (owever, cash credit>overdraft is inconvenient to the anks
and hampers credit planning. It was the most popular method of ank financing of
working capital in India till the early nineties. /ith the emergence of the new
anking since mid*nineties, cash credit cannot at present e"ceed 58J of the
ma"imum permissile ank finance 6M1BF7>credit limit to any orrower.
Loa!s: under this arrangement, the entire amount of orrowing is credited to the
current account of the orrower or released in cash. !he orrower has to pay
interest on the total amount. !he loans are repayale on demand or in periodic
installments. !hey can also e renewed from time to time. As a form of financing,
loans imply a financial discipline on the part of the orrowers. From a modest
eginning in the early nineties, at least 98J of M1BF must e in form of loans in
India.
c 8ills Purchase"%Discou!te": !his arrangement is of relatively recent origin in
India. /ith introduction of the
-
8/19/2019 Hitesh Working Capital
32/52
drawer and the genuineness of the ill. !o populari;e the scheme, the discount rates
are fi"ed at lower rates than those of cash credit. !he discounting anker asks the
drawer of the ill to have his ill accepted y the drawee ank efore discounting it.
!he later grants acceptance against the cash credit limit, earlier fi"ed y it, on the
asis of the orrowing value of stocks. !herefore, the uyer who uys goods on
credit cannot use the same goods as a source of otaining additional ank credit.
!he modus operandi of ill finance as a source of working capital financing is that a
ill that arises out of a trade sale*purchase transaction on credit. !he seller of goods
draws the ill on the purchaser of goods, payale on demand or after a usance
period not e"ceeding D8 days. 3n acceptance of the ill y the purchaser, the seller
offers it to the ank for discount>purchase. 3n discounting the ill, the ank releases
the funds to the seller. !he ill is presented y the ank to the purchaser>acceptor of
the ill on due date for payment. !he ills can e rediscounted with the other
anks>0BI. (owever, this form of financing is not popular in the country.
d7 Term Loa!s /or Wor+i!# Capital: Hnder this arrangement, anks
advance loans for :*@ years payale in yearly or half*yearly installments.
a Letter o/ Cre"it # /hile the other forms of ank credit are direct forms of
financing in which anks provide funds as well as ear risk, letter of credit is an
indirect form of working capital financing and anks assume only the risk, the
credit eing provided y the suppliers himself.
!he purchaser of goods on credit otains a letter of credit from a ank. !he ank
undertakes the responsiility to make payment to the supplier in case the uyer fails
to meet his oligations. !hus , the modus operandi of letter of credit is that the
supplier sells goods on credit>e"tends credit to the purchaser, the ank gives a
guarantee and ears risk only in case of default y the purchaser.
@ 5o"e o/ (ecurit$
a 6$pothecatio!# Hnder this mode of security, the anks provide credit to orrowers
against the security of movale property, usually inventory of goods. !he goods
:5
-
8/19/2019 Hitesh Working Capital
33/52
hypothecated, however, continue to e in the possession of the owner of these goods 6i.e.
the orrower7. !he rights of the lending ank 6hypothecate7 depend upon the terms of the
contract etween the orrower and the lender. Although the ank does not have physical
possession of the goods, it has the legal right to sell the goods to reali;e the outstanding
loan. (ypothecation facility is normally is not availale to new orrowers.
Ple"#e# 1ledge, as a mode of security, is different from hypothecation in that in the
former, unlike in the later, the goods which are offered as security are transferred to the
physical possession of the lender. An, essential per%uisite of pledge, therefore, is that the
goods are in the custody of the ank. !he orrower, who offers the security is, called a
paw nor’ 6pledger7, while the ank is called the 1awnee’ 6pledgee7. !he lodging of
goods y the pledger to the pledgee is a kind of ailment. !herefore, pledge creates some
liailities for the ank. It must take reasonale care of goods pledged with it. In case of
non*payment of the loans, the ank en'oys the right to sell the goods.
c Lie!# !he term lien refers to the right of a part to retain goods elonging to another
party until a det due to him is paid. +ien can e of two types# 6i7 particular lien, and 6ii7
general lien. 1articular lien is a right to retain goods until a claim pertaining to theses
goods is fully paid. 3n the other hand, general lien can e applied till all dues of the
claimant are paid. Banks usually en'oy general lien.
d 5ort#a#e# It is the transfer of a legal>e%uitale interest in specific immovale property
for securing the payment of det. !he person who parts with the interest in the property is
called mortgagor and the ank in whose favor the transfer takes place is the mortgagee.
!he instrument of transfer is called the mortgage deed. Mortgage is, thus, conveyance of
interest in the mortgaged property. !he mortgage interest in the property is terminated as
soon as the det is paid. Mortgage are taken as an additional security for working capital
credit anks.
e Char#e# /here immovale property of one person is, y the act of parties or y theoperation of law, 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. !he provision are
as follows#
::
-
8/19/2019 Hitesh Working Capital
34/52
• A charge is not the transfer of interest in the property though it is security for
payment. But mortgage is a transfer of interest in the property.
• A charge may e created y the act of parties or y the operation of law. But a
mortgage can e created only y the act of parties.
• A charge need not e made in writing ut a mortgage deed must e attested.
• 2enerally, a charge cannot e enforced against the transferee for consideration
without notice. In a mortgage, the transferee of the mortgage property can
ac%uire the remaining interest in the property, if any is left.
Reser&e 8a!+ o/ I!"ia rame0or+ /or Re#ulatio! o/ 8a!+ Cre"it
After mid*nineties, the framework for regulation of ank credits has een rela"ed
permitting anks greater fle"iility in tune with the emergence of new anking in the country,
focusing on viaility and profitaility in contrast to the earlier thrust on social>development
anking. !he notale features of the framework>regulation related to fi"ation of norms for
ank lending to industry. !he norms are#
a I!&e!tor$ a!" Recei&a.le Norms# !he norms refer to the ma"imum level for
holding inventories and receivales in each industry. 0aw materials were e"pressed as so
many months’ consumptions$ /I1 as so many month’s cost of production$ finished goods
and receivales as so many months of cost of sales and sales respectively. !hese norms
represent the ma"imum levels of holding inventory and receivales in each industry.
Borrowers were not e"pected to hold more than that level. !he fi"ation of these norms
was, thus, intended to reduce the dependency of industry on ank credit.
Le!"i!# Norms%Approach to Le!"i!#%5P8# According to the lending
norms, a part of the current assets should e financed y the trade credit and other current
liailities. !he remaining part of the current assets, termed as working capital gap, should
e partly financed y the owner’s funds and long term orrowings and partly y short
term ank credit. !he approach to lending is vitally significant. It takes into account all
the current assets re%uirements of orrower’s total operational needs and not merely
inventories or receivales$ it also takes into account all the other sources of finance at his
:?
-
8/19/2019 Hitesh Working Capital
35/52
command. Another merit of the approach is that it invarialy ensures a positive current
ratio and, thus, keeps under check any tendency to overtrade with orrowed funds.
c orms o/ i!a!ci!#%(t$le o/ Cre"it# In DD, a mandatory limit on cash credit
and a loan system of delivery of ank credit was introduced. !he cash*credit limit was
initially limited to 8J of the M1BF. !he alance ?8J could e availed of as short term
loans. !he cash credit limit sanctions are currently 58J and loan component 98J.
d I!/ormatio! a!" Reporti!# ($stem # !he main components of the information
and reporting system are four, namely,
• 7uarterl$ I!/ormatio! ($stem: orm I2 Its contents are 6i7 production and
sales estimates for the current and the ne"t %uarter, and 6ii7 current assets and
current liailities estimates for the ne"t %uarter.
• 7uarterl$ I!/ormatio! ($stem: orm II2 It contains 6i7 actual production and
sales during the current year and for the latest completed year, and 6ii7 actual
current assets and current liailities for the latest completed %uarter.
• 6al/-$earl$ Operati!# (tateme!t: orm III2 !he actual operating
performances for the half*year ended against the estimates are given in this.
• 6al/-$earl$ Operati!# (tateme!t: orm III8. !he estimates as well as the
actual sources and uses of funds for the half*year ended are given.
Commercial Papers
Commercial 1aper 6C17 is a short term unsecured negotiale instrument, consisting of usance
promissory notes with a fi"ed maturity. It is issued on a discount on a face value asis ut it can
also e issued in interest earing form. A C1 when issued y a company directly to the investor is
called a direct paper. !he companies announce current rates of C1s of various maturities, and
investors can select those maturities which closely appro"imate their holding period. /hen C1s
are issued y security dealer on ehalf of their corporate customers, they are called dealer paper.
!hey uy at a price less than the commission and sell at the highest possile level. !he maturities
of C1s can e tailored within the range to specific investments.
a7 A"&a!ta#es
* C1 is a simple instrument and hardly involves any documentation.
:
-
8/19/2019 Hitesh Working Capital
36/52
* It is fle"ile in terms of maturities which can e tailored to match the cash flow of
the issuer.
* A well rated company can diversify its sort*term sources of finance from anks to
money market at cheaper cost.
* !he investors can get higher returns than what they can get from the anking
system.
* Companies which are ale to raise funds through C1s have etter financial
standing.
* !he C1s are unsecured and there are no limitations on the end*use of funds raised
through them.
* As negotiale>transferale instruments, they are highly li%uid.
7 rame0or+ o/ I!"ia! CP 5ar+et
!he C1s emerged as sources of short*term financing in the early nineties. !hey are regulated y
0BI. !he main element of present framework are given elow.
• C1’s can e issued for periods ranging etween days and one year. 0enewal of C1’s is
treated as fresh issue.
• !he minimum si;e of an issue is 0s.5 lakh and the minimum unit of suscription is 0s.
lakh.
• !he ma"imum amount that a company can raise y way of C1s is 88J of the working
capital limit.
• A company can issue C1s only if it has a minimum tangile net worth of 0s.? crore, a
fund*ased working limit of 0s.? crore or more, at least a credit rating of 15 6Crisil 7, A5
6 Icra 7, 10*5 6 Care 7 and 4*5 6 4uff - 1helps 7 and its orrowal account is classified as
standard asset.
•!he C1s should e issued in the form of usance promissory notes, negotiale y
endorsement and deliver at a discount rate freely determined y the issuer. !he rate of
discount also includes the cost of stamp duty 68.5 to 8.J7, rating charges 68. to 8.5J7,
dealing ank fee 68.5J7 and stand y facility 68.5J7.
:
-
8/19/2019 Hitesh Working Capital
37/52
• !he participants>investors in C1s can e corporate odies, anks, mutual funds, H!I,
+IC, 2IC, and
-
8/19/2019 Hitesh Working Capital
38/52
b 5echa!ism# Credit sales generate the factoring usiness in the ordinary course of
usiness dealings. 0eali;ation of credit sales is the main function of factoring services.
3nce a sale transaction is completed, the factor steps in to reali;e the sales. !hus the
factor works etween the seller and the uyer and sometimes with the seller’s ank
together.
c u!ctio!s o/ a actor # 4epending on the type>form of factoring, the main functions
of a factor, in general terms, can e classified into five categories#
i i!a!ci!# /acilit$%tra"e "e.ts :
!he uni%ue feature of factoring is that a factor purchases the ook dets of his
client at a price and the dets are assigned in favor of the factor who is usually
willing to grant advances to e"tent of, say, 98J of the assigned dets. /here the
dets are factored with recourse, the finance provided would ecome refundale
y the client in case of non*payment of the uyer. (owever, where the dets are
factored without recourse, the factor’s oligation to the seller ecomes asolute
on the due date of the invoice whether or not the uyer makes the payment.
iiG 5ai!te!a!ce%a"mi!istratio! o/ sales le"#er:
!he factor maintains the clients’ sales ledger. In addition, the factor also maintains
a customer*wise record of payments spread over a period of time so that any
change in the payment pattern can e easily identified.
iiiG Collectio! /acilit$ o/ accou!ts recei&a.le:
!he factor undertakes to collect the receivales on the ehalf of the client
relieving him of the prolems involved in collection, and enales him to
concentrate on other important functional areas of the usiness. !his also enales
the client to reduce the cost of collection y way of savings in manpower, time
and efforts.
i&G Cre"it Co!trol a!" Cre"it Restrictio!:
!he factor in consultation with the client fi"es credit limits for approved
customers. /ithin these limits, the factor undertakes to purchase all trade dets of
:9
-
8/19/2019 Hitesh Working Capital
39/52
the customer without resource. In other words, the factor assumes the risk of
default in payment y the customer. 3perationally, the line of credit>credit limit
up to which the client can sell to the customer depends on his financial position,
his past payment record and value of goods sold y the client to the customer.
&G A"&isor$ (er&ices:
!hese services are a spin*off of the close relationship etween a factor and a
client. By virtue of their speciali;ed knowledge and e"perience in finance and
credit dealings and access to e"tensive credit information, factors can provide a
variety of incidental advisory services to their clients.
&i Cost o/ (er&ices:
!he factors provide various services at a charge. !he charge for collection and
sales ledger administration is in the form of a commission e"pressed as a value of
det purchased. It is collected in advance. !he commission for short term
financing as advance part*payment is in the form of interest charge for the period
etween the date of advance payment and the date of collection date. It is also
known as discount charge.
:D
-
8/19/2019 Hitesh Working Capital
40/52
INANCIAL (TATE5ENT(
Financial statement is a collection of data organi;ed according to logical and consistent
accounting procedure to convey an under*standing of some financial aspects of a usiness firm.
It may show position at a moment in time, as in the case of alance sheet or may reveal a series
of activities over a given period of time, as in the case of an income statement. !hus, the term
financial statements’ generally refers to the two statements
67 !he position statement or Balance sheet.
657 !he income statement or the profit and loss Account.
3BG)C!IE)& 3F FI
!he following o'ectives of financial statements# *
. !o provide reliale financial information aout economic resources and oligation of a
usiness firm.
5. !o provide other needed information aout charges in such economic resources and oligation.
:. !o provide reliale information aout change in net resources 6recourses less oligations7
missing out of usiness activities.
?. !o provide financial information that assets in estimating the learning potential of the
usiness.
?8
-
8/19/2019 Hitesh Working Capital
41/52
LI5ITATION( O INANCIAL (TATE5ENT(:-
!hough financial statements are relevant and useful for a concern, still they do not present a final
picture a final picture of a concern. !he utility of these statements is dependent upon a numer of
factors. !he analysis and interpretation of these statements must e done carefully otherwise
misleading conclusion may e drawn.
Financial statements suffer from the following limitations# *
. Financial statements do not given a final picture of the concern. !he data given in these
statements is only appro"imate. !he actual value can only e determined when the usiness is
sold or li%uidated.
5. Financial statements have een prepared for different accounting periods, generally one year,
during the life of a concern. !he costs and incomes are apportioned to different periods with a
view to determine profits etc. !he allocation of e"penses and income depends upon the personal
'udgment of the accountant. !he e"istence of contingent assets and liailities also make the
statements imprecise. &o financial statement are at the most interim reports rather than the final
picture of the firm.:. !he financial statements are e"pressed in monetary value, so they appear to give final and
accurate position. !he value of fi"ed assets in the alance sheet neither represent the value for
which fi"ed assets can e sold nor the amount which will e re%uired to replace these assets. !he
alance sheet is prepared on the presumption of a going concern. !he concern is e"pected to
continue in future. &o fi"ed assets are shown at cost less accumulated depreciation. Moreover,
there are certain assets in the alance sheet which will reali;e nothing at the time of li%uidation
ut they are shown in the alance sheets.
?. !he financial statements are prepared on the asis of historical costs or original costs. !he
value of assets decreases with the passage of time current price changes are not taken into
account. !he statement are not prepared with the keeping in view the economic conditions. the
alance sheet loses the significance of eing an inde" of current economic realities. &imilarly, the
profitaility shown y the income statements may e represent the earning capacity of the
?
-
8/19/2019 Hitesh Working Capital
42/52
concern.
. !here are certain factors which have a earing on the financial position and operating result of
the usiness ut they do not ecome a part of these statements ecause they cannot e measured
in monetary terms. !he asic limitation of the traditional financial statements comprising the
alance sheet, profit - loss A>c is that they do not give all the information regarding the financial
operation of the firm. c shows the result of operation during a certain
period in terms revenue otained and cost incurred during the year. !hus, !he financial position
and operation of the firm.
INANCIAL (TATE5ENT ANAL'(I(
It is the process of identifying the financial strength and weakness of a firm from the availale
accounting data and financial statements. !he analysis is done.
?5
-
8/19/2019 Hitesh Working Capital
43/52
E(TI5ATION O WOR)IN* CAPITAL RE7UIRE5ENT
HAN EA5PLEG
ELE5ENT(AVERA*E PERIOD O
CREDIT
E(TI5ATE OR
CO5IN* 'EAR
1urchase of materials weeks 5,8,888
/ages . weeks ,D,888
A"mi!2 o%h
0ent 5 months ?9,888
&alaries month :,888
3ffice e"pense 5 weeks ?,88
actor$ o%h HI!clu"es
"epreciatio! ;?G5 months 8,888
(ales
Cash ?,888
Credit @ weeks ,8,888
?:
-
8/19/2019 Hitesh Working Capital
44/52
• 0aw materials are in stock for ? weeks
• F2 are in stock for month
• 1rocess time days
• Factory overheads and wages accrue evenly
• F2 are valued at cost of production
• Minimum cash alance re%uired is ?8,888
Assumptio!s:
7 1roduction and sales are evenly distriuted throughout the year
57 0aw materials are issued to production right in the eginning, whereas wages and
overheads are incurred evenly.
:7 days is taken as 5 weeks
7 year 5 weeks
(OLUTION:-
8u"#ete" P%L
ELE5ENT 'EARL' WEE)L'
0aw Material 5,8,888 ,888
/ages ,D,888 :,@8
??
-
8/19/2019 Hitesh Working Capital
45/52
Prime Cost ,,;;; J,K;
3verheads 8,888 ,?
Cost O/ *oo"s (ol" ,,;;; B,B;
Calculatio! o/ Wor+i!# Capital Re3uireme!t
CURRENT A((ET( R(2 R(2
HAG (toc+
0aw Material
65,8,888>5 P?758,888
Finished 2oods
6,888>5P?7
:D, B,FF
H8G WIP
0aw Material
65,8,888>5P57
8,888
?
-
8/19/2019 Hitesh Working Capital
46/52
/ages
6,D,888>5P5P8.7
:,@8
3verheads
68,888>5 P5P8.7
,? B;
HCG De.tors
HF,;,;;;%KG
JK,;;
HDG Cash ;,;;;
TOTAL C2A2 ,;,;
H-GCURRENT LIA8ILITIE(
HAG Cre"itors
0aw materials
65,8,888>5P7
@;,;;;
68GWa#es
6,D,888>5P.7
,F
?
-
8/19/2019 Hitesh Working Capital
47/52
HCG A"mi!istratio! o&erhea"s
0ent 6?9,888>5P97 @,:9
&alary 6:,888>5P?7 5,@D
3ffice e"pense 6?,88>5P57 ,@98 ,B;
HDG actor$ o&erhea"s
8,88>5P97
B,@
TOTAL C2L2 F,K;
WC re3"2HCA-CLG ,,F
CURRENT RATIO:
CURRENT RATIO CURRENT A((ET( % CURRENT LIA8ILITIE(
For the calculation this ratio
• Current assets include inventories, sundry detors, cash and ank alances and
loans - advances
• Current liailities include Current liailities and provisions.
CALCULATION O CURRENT RATIO
Kear 58 585 58:
?@
-
8/19/2019 Hitesh Working Capital
48/52
Current Assets 9.5D 9:.5 :,.@
Current +iailities 5@.?5 58.9 ::.?9
Current 0atio 5.D# ?.8:# ?.89#
I!terpretatio!:-
As we know that ideal current ratio for any firm is 5#. If we see the current ratio of thecompany for last three years it has increased from 58 to 58:. !he current ratio of
company is more than the ideal ratio. !his depicts that company’s li%uidity position is
sound. Its current assets are more than its current liailities.
7UIC) RATIO HORG ACID TE(T RATIO:
!his is the ratio of li%uid assets to current liailities. Is shows a firm’s aility to meet
current liailities with its most li%uid or %uick assets. !he standard ratio # is considered ideal
ratio for a concern. +i%uid assets are those, which can e easily converted in to cash within a
short period of time without loss of value. !his ratio can e calculated y using the formula#
LI7UID RATIO LI7UID A((ET( % CURRENT LIA8ILITIE(
For the calculation of this ratio
A li%uid asset of %uick asset includes &undry 4etors, Cash and Bank alance and +oan -
Advances.
?9
-
8/19/2019 Hitesh Working Capital
49/52
Current liailities include Current +iailities and 1rovisions.
CA+CH+A!I3< 3F HIC 0A!I3
'ear ; ; ;@
uick Assets ??.? ?@.?: .
Current +iailities 5@.?5 58.9 ::.?9
uick 0atio . # 5.: # .9 #
CA(6 RATIO:-
2enerally receivales are more li%uid the inventories, ut there may e dough regarding
their reliaility in time. (ence only asolute li%uid assets such as Cash in hand, Cash at ank,
Marketale &ecurities are ideal taken into consideration #5 is considered as ideal ratio. !his ratio
also called asolute +i%uid 0atio.
!his ratio is shown as#*
CA(6 RATIO A8(OLUTE LI7UID A((ET( % CURRENT LIA8ITIE
NET WOR)IN* CAPITAL RATIO:-
!he difference etween current assets and current liailities including short term ank orrowing
is called
-
8/19/2019 Hitesh Working Capital
50/52
potential reservoir of funds. It can e related to net assets.
NET WOR)IN* CAPITAL NET WOR)IN* CAPITAL % NET A((ET(2
CONCLU(ION
!he relative li%uidity of a firm’s assets structure is measured y the current ratio. !he
greater this ratio the less risky as well a less profitale the firm will e and vice*versa. Also the
relati&e li3ui"it$ of a firm’s financial structure can e measured y short* term financing to total
financing ratio. !he lower this ratio, less risky as well a less profitale the firm will e and vice*
versa.
!hus, in shaping its /C policy, the firm should keep in mind these two dimensionsM
relati&e assets li3ui"it$ Hle&el o/ curre!t assetsG a!" relati&e /i!a!ce li3ui"it$ Hle&el o/ short-
term /i!a!ci!#G2
8
-
8/19/2019 Hitesh Working Capital
51/52
-
8/19/2019 Hitesh Working Capital
52/52
top related