Wednesday, May 22, 2019

SOURCES OF WORKING CAPITAL


  • FINANCING OF WORKING CAPITAL
    WORKING CAPITAL MGMT
    FINANCIAL MGMT
  • WORKING CAPITAL REQUIREMENT
  1. PERMANENT OR FIXED WORKING CAPITAL REQUIREMENT:-IS THE MINIMUM AMOUNT WHICH IS REQUIRED TO ENSURE EFFECTIVE UTILIZATION OF FIXED FACILITIES AND FOR MAINTAINING THE CIRCULATION OF CURRENT ASSETS, THERE IS ALWAYS A MINIMUM LEVEL OF CURRENT ASSETS WHICH IS CONTINUOUSLY REQUIRED BY THE ORGANIZATION TO CARRY OUT ITS NORMAL BUSINESS.
  2. TEMPORARY OR VARIABLE WORKING CAPITAL:-IS THE AMOUNT OF WORKING CAPITAL WHICH IS REQUIRED TO MEET THE SEASONAL DEMAND AND SOME SPECIAL EXIGENCIES.
  3. FIXED PROPORTION OF THE WORKING CAPITAL MAY BE FINANCED FROM FIXED CAPITAL SOURCES WHILE TEMPORARY WORKING CAPITAL FROM THE SHORT TERM SOURCES
  • PERMANENT SOURCES
  1. SHARES
  2. DEBENTURE
  3. PUBLIC DEPOSITS
  4. PLOUGHING BACK OF PROFITS
  5. LOANS FROM FINANCIAL INSTITUTIONS
  • SHORT TERM WORKING CAPITAL
  1. COMMERCIAL BANKS
  2. INDIGENOUS BANKERS
  3. TRADE CREDITORS
  4. INSTALLMENT CREDIT
  5. ADVANCES
  6. ACCOUNT RECEIVABLE
  7. ACCRUED EXPENSES
  8. COMMERCIAL PAPER
  9. ACCRUED EXPENSES
  10. DEFERRED INCOMES
  11. COMMERCIAL PAPERS

  • LONG TERM SOURCES
  • SHARES:
  1. ISSUE OF SHARE IS THE MOST IMPORTANT SOURCE FOR RAISING THE PERMANENT WORKING CAPITAL
  2. A  COMPANY CAN ISSUE EQUITY SHARES OR PREFERENCE SHARE
  3. PREFERENCE SHARES CARRY PREFERENTIAL RIGHT IN RESPECT OF DIVIDEND AT FIXED RATE AND IN REGARD TO REPAYMENT OF CAPITAL AT THE TIME OF WINDING UP OF THE COMPANY
  4. EQUITY SHARES ARE THE OWNERS OF THE COMPANY AND THEY HAVE VOTING RIGHT. DOES NOT HAVE ANY FIXED COMMITMENT CHARGES AND DIVIDEND IS PAID SUBJECT TO THE AVAILABILITY OF SUFFICIENT PROFITS
  • DEBENTURES:-
  1. IT IS THE ACKNOWLEDGMENT OF THE DEBT AND DEBENTURE HOLDERS ARE THE CREDITOR OF THE COMPANY
  2. A FIXED RATE OF INTEREST IS PAID TO THEM
  3. THE INTEREST ON DEBENTURE IS CHARGE AGAINST THE PROFIT
  4. FIXED OR FLOATING CHARGE
  5. VARIOUS TYPES SIMPLE,SECURED DEBENTURES,REDEEMABLE DEBENTURES,IRREDEEMABLE DEBENTURES,REDEEMABLE DEBENTURES,CONVERTIBLE DEBENTURE AND NON CONVERTIBLE DEBENTURE
  6. THE FIRM ENJOY THE TRADING ON EQUITY,RETENTION OF CONTROL
  • PUBLIC DEPOSITS:-ARE THE FIXED DEPOSITS ACCEPTED DIRECTLY FROM THE PUBLIC.PUBLIC DEPOSIT AS A SOURCE OF FINANCE HAVE A NUMBER OF ADVANTAGES AS INEXPENSIVE SOURCE OF FINANCE
  • PLOUGHING BACK OF PROFITS:- MEANS THE REINVESTMENT BY ORGANIZATION OF THE PROFIT, INTERNAL SOURCE OF FIANCE AND MOST SUITABLE FOR THE ESTABLISHED FIRM FOR ITS EXPANSION. CHEAPEST SOURCE OF FINANCE
  • LOANS FROM FINANCIAL INSTITUTIONS:-COMMERCIAL BANKS,DEVELOPMENT BANKS, ALSO PROVIDE SHORT TERM AS WELL AS LONG TERM SOURCES. INTEREST ON SUCH LOAN IS CHARGED ON SUCH LOAN AT FIXED RATE AND THE AMOUNT OF THE LOAN IS TO BE RAISED BY WAY OF INSTALLMENT

  • SOURCES OF SHORT TERM WORKING CAPITAL
  • INTERNAL SOURCES:-
  1. PROVISION FOR DEPRECIATION: AS THE DEPRECIATION INVOLVES NO OUTFLOW OF CASH ACCORDING TO ACCOUNTING TERMINOLOGY IT IS USED FOR FINANCING INTERNAL OPERATIONS OF THE BUSINESS
  2. PROVISIONS FOR TAXATION
  3. ACCRUED EXPENSES:- AN ACCRUED EXPENSE WHICH IS DUE BUT NOT YET PAID. SO THE TIME GAP INVOLVED BETWEEN DUE DATE AND PAYMENT DATES OF THESE EXPENSES MAY BE USED AS SOURCE OF INTERNAL FINANCING
  4. FUNDS GENERATED FROM THE OPERATIONS: FUNDS GENERATED FROM OPERATIONS DURING THE ACCOUNTING PERIOD

  • SOURCES OF SHORT TERM (EXTERNAL)
  • INDIGENOUS BANKERS:- MONEY CAN BE BORROWED FROM THE PRIVATE MONEY LENDERS BUT THEIR RATE OF INTEREST IS QUITE HIGH
  • TRADE CREDIT:-TRADE CREDIT ARRANGEMENT WITH THE SUPPLIERS IS AN IMPORTANT SOURCE OF SHORT TERM FINANCE. THE CREDIT WORTHINESS OF THE FIRM AND THE CONFIDENCE OF THE SUPPLIERS ARE THE MAIN BASIS OF SECURING TRADE CREDIT. IT IS MOSTLY GRANTED ON OPEN ACCOUNT. SUPPLIER SENDS THE GOODS AND PAYMENT IS RECEIVED IN FUTURE. WHEN A FIRM DELAYS THE PAYMENT BEYOND THE DUE DATE AS PER THE TERMS OF THE SALE INVOICE,IT IS CALLED STRETCHING ACCOUNT RECEIVABLE.
  • INSTALLMENT OF CREDIT:-ASSETS ARE PURCHASED AND POSSESSION OF GOODS IS TAKEN IMMEDIATELY BUT THE PAYMENT IS MADE IN INSTALLMENT OVER A PERIOD OF TIME
  • ADVANCES:-SOME BUSINESS HOUSE GETS ADVANCES FROM THEIR CLIENT AGAINST ORDERS. CHEAP SOURCE OF FINANCE. FIRMS MANUFACTURING INDUSTRIAL PRODUCTS PREFER TO TAKE ADVANCES FROM THEIR CUSTOMERS
  • FACTORS OR ACCOUNT RECEIVABLES:- A FACTOR IS  A FINANCIAL INSTITUTION WHICH OFFERS SERVICES RELATING TO THE MGMT AND FINANCING OF DEBTS ARISING OUT OF CREDIT SALES. FACTOR RENDERS SERVICES VARYING FROM BILL DISCOUNTING TO TOTAL TAKE OVER OF ADMINISTRATION OF CREDIT SALES INCLUDING MAINTENANCE OF SALES LEDGER,COLLECTION OF RECEIVABLES,CREDIT CONTROL,PROTECTION FROM BAD DEBTS,PROVISIONS FOR FINANCE AND RENDERING OF ADVISORY SERVICES TO THEIR CLIENTS. FACTORING MAY BE ON RECOURSE BASIS WHERE THE RISK OF BAD DEBT IS BORNE BY THE CLIENT OR ON NON RECOURSE WHERE THE RISK IS BORNE BY THE FACTOR
  • DEFERRED INCOME
  • DEFERRED INCOMES:-ARE THE INCOME RECEIVED IN ADVANCE BEFORE SUPPLYING GOODS OR SERVICES,
  • THEY REPRESENT FUNDS RECEIVED BY FIRM FOR WHICH IT HAS TO SUPPLY GGODS OR SERVICES IN FUTURE
  • THESE FUNDS INCREASE THE LIQUIDITY OF A FIRM
  • CONSTITUTE AN IMPORTANT SOURCE OF FINANCE
  • BUT THE FIRM HAVING REPUTATION CAN DEMAND DEFFER ED INCOME

  • WORKING CAPITAL FINANCED BY COMMERCIAL BANKS
  • LOANS:- WHEN A BANK MAKES AN ADVANCE IN LUMP SUM AGAINST SOME SECURITY IT IS CALLED LOAN. IN CASE OF LOAN,A SPECIFIED AMOUNT IS SANCTIONED BY THE BANK TO THE CUSTOMER. THE BORROWER IS REQUIRED TO PAY INTEREST ON THE AMOUNT OF LOAN FROM THE DATE OF SANCTION. PAYABLE IN LUMP SUM OR INSTALLMENT
  • CASH CREDIT:-A CASH CREDIT IS AN ARRANGEMENT BY WHICH A BANK ALLOWS CUSTOMERS TO BORROW MONEY UP TO A CERTAIN LIMIT AGAINST SOME TANGIBLE SECURITIES OR GUARANTEES. THE CUSTOMER CAN WITHDRAW FROM HIS CASH CREDIT LIMITS ACCORDING TO HIS NEEDS AND INTEREST IS CHARGED ON DAILY BASIS.
  • WORKING CAPITAL FINANCED BY COMMERCIAL BANKS
  • OVER DRAFT:-OVERDRAFT ARE AGREEMENT WITH A BANK BY WHICH A CURRENT ACCOUNT HOLDER IS ALLOWED TO WITHDRAW MORE THAN THE BALANCE TO HIS CREDIT UP TO A CERTAIN LIMIT. INTEREST IS CHARGED ON DAILY OVERDRAWN BALANCE
  • PURCHASING AND DISCOUNTING OF BILLS:-THE SELLER DRAWS THE BILL ON THE PURCHASER AND PURCHASER ACCEPT IT AND SELLER GETS IT DISCOUNTED FROM THE BANK AND BANK ON MATURITY DATE PRESENT TO THE ACCEPT OR
  • LETTER OF CREDIT
  •  A LETTER OF CREDIT IS POPULARLY KNOWN AS L/C IS AN UNDERTAKING BY BANK TO HONOR THE OBLIGATION OF ITS CUSTOMERS UP TO A SPECIFIED AMOUNT,SHOULD THE CUSTOMER FAILS TO DO SO. IT HELPS CUSTOMER TO OBTAIN CREDIT FROM SUPPLIER BECAUSE IT ENSURE THERE IS NO RISK OF NO PAYMENT. LC IS SIMPLY A GUARANTEE BY THE BANK TO THE SUPPLIER THAT BILL UP TO A SPECIFIED AMOUNT WOULD BE HONORED. IN CASE THE CUSTOMER FAILS TO PAY THE AMOUNT,ON DUE DATE TO ITS SUPPLIER THE BANK ASSUMES THE LIABILITY OF ITS CUSTOMERS.
  • COMMERCIAL PAPER: COMMERCIAL PAPER REPRESENTS UNSECURED PROMISSORY NOTES ISSUED BY FIRMS TO RAISE SHORT TERM FUNDS. ONLY A COMPANY WHICH IS LISTED ON STOCK EXCHANGE HAS NET WORTH OF 10 CRORE AND A MAXIMUM PERMISSIBLE BANK FINANCE OF RS 25 CRORES CAN  ISSUE COMMERCIAL PAPERS NOT EXCEEDING 30% OF ITS WORKING CAPITAL LIMIT



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