Working Capital

Working Capital
Management

Project Guide : Prof. P.P. Ghosh

Name : Rajat Gupta

Room No : 12
Roll No : 0364
College : St. Xavier’s
College

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ACKNOWLEDGEMENT

IN PREPARING THIS REPORT A CONSIDERABLE AMOUNT OF

THINKING AND INFORMATIONAL INPUTS FROM VARIOUS
SOURCES WERE INVOLVED.

I TAKE THE PRIVILEGE TO ACKNOWLEDGE AND EXTEND MY

HEARTFELT GRATITUDE TO PROF. S.SIRCAR FOR HIS
ENCOURAGEMENT AND SUPPORT WHICH HAS MADE THE
COMPLETION OF THIS PROJECT POSSIBLE.

THE BOOKS REFERRED TO ME WERE OF GREAT USE IN

BUILDING THE PROJECT. LASTLY I WOULD LIKE TO THANK MY
FRIENDS WHO ENCOURAGED ME TO DO THIS RESEARCH WORK
AND ALL THOSE WHO CONTRIBUTED DIRECTLYOR INDIRECTLY
IN COMPLETING THIS PROJECT.

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PREFACE

To start any business, First of all we need finance and the success
of that business entirely depends on the proper management of
day-to-day finance and the management of this short-term capital
or finance of the business is called Working Capital Management.

Working Capital is the money used to pay for the everyday trading
activities carried out by the business - stationery needs, staff
salaries and wages, rent, energy bills, payments for supplies and
so on.

I have tried to put my best effort to complete this task on the basis
of skill that I have achieved during the last one year study in the
institute.

I have tried to put my maximum effort to get the accurate statistical

data. However I would appreciate if any mistakes are brought to my
by the reader.

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1.1. THE BACKGROUND:

A project entitled “A study on working capital management of Adani

Exports Ltd.” was carried out with an intention to analyze the utilization
of working capital. The study helps to know the level of current asset and
current liability. Various analytical tools is been used to analyze and to
make inference. Findings are based on the analysis; the major finding
was that the company has a good liquidity position and profit
percentage. Based on the findings various suggestions have been given
for the further improvement of the effective utilization of the working
capital.

1.2. THE PROBLEM STATEMENT:

Managing working capital in a manufacturing firm is very difficult and

risky position. It is required to maintain the liquidity position of any firm to
be good. This is the main problem for all firms. So, components of
working capital like inventory management, cash management and
receivables management should be managed well.

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1.3. OBJECTIVE OF THE STUDY:

Study of the working capital management is important because unless

the Working capital is managed effectively, monitored efficiently planed
properly and reviewed periodically at regular intervals to remove
bottlenecks if any the Company cannot earn profits and increase its
turnover. With this primary Objective of the study, the following further
objectives are framed for a depth Analysis.

• To study the working capital management of Adani Exports Ltd.

• To study the optimum level of current assets and current liabilities of

the Company.

• To study the liquidity position through various working capital related

Ratios.

• To study the working capital components such as receivables

accounts, Cash management.

•To estimate the working capital requirement of Adani Exports Ltd

•To study the operating and cash cycle of the company.

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1.4. RESEARCH METHODOLOGY

1.4.1 INTRODUCTION:
Research methodology is a way to systematically solve the research
problem. It may be understood as a science of studying now research is
done systematically. In that various steps, those are generally adopted
by a researcher in studying his problem along with the logic behind
them.
It is important for research to know not only the research method but
also know methodology. The procedures by which researcher go about
their work of describing, explaining and predicting phenomenon are
called methodology. Methods comprise the procedures used for
generating, collecting and evaluating data. All this means that it is
necessary for the researcher to design his methodology for his problem
as the same may differ from problem to problem. Data collection is
important step in any project and success of any project will be largely
depend upon now much accurate you will be able to collect and how
much time, money and effort will be required to collect that necessary
data, this is also important step. Data collection plays an important role
in research work. Without proper data available for analysis you cannot
do the research work accurately.

1.5.2) TYPES OF DATA COLLECTION:

There are two types of data collection methods available.

• Primary data collection

• Secondary data collection

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1.4.2.1) Primary Data:

The primary data is that data which is collected fresh or first hand, and
for first time which is original in nature. Primary data can collect through
personal interview, questionnaire etc. to support the secondary data.

1.4.2.2) Secondary Data Collection Method:

The secondary data are those which have already collected and stored.
Secondary data easily get those secondary data from records, journals,
annual reports of the company etc. It will save the time, money and
efforts to collect the data. Secondary data also made available through
trade magazines, balance sheets, books etc.
This project is based on primary data collected through personal
interview of head of account department, head of SQC department and
other concerned staff member of finance department. But primary data
collection had limitations such as matter confidential information thus
project is based on secondary information collected through five years
annual report of the company, supported by various books and internet
sides. The data collection was aimed at study of working capital
management of the company.
Project is based on

• Annual report of Adani Exports Ltd 2004-05

• Annual report of Adani Exports Ltd 2003-04

• Annual report of Adani Exports Ltd 2002-03

• Annual report of Adani Exports Ltd 2001-02

• Annual report of Adani Exports Ltd 2000-01

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1.5. SCOPE OF THE STUDY:

The scope of the study is identified after and during the study is
conducted. The Study of working capital is based on tools like trend
Analysis, Ratio Analysis, Working capital leverage, operating cycle etc.
Further the study is based on last 5 years Annual Reports of Jain
Irrigation Systems Ltd. And even factors like Competitor’s analysis,
industry analysis were not considered while preparing this project.

1.6. LIMITATIONS OF THE STUDY:

Following limitations were encountered while preparing this project:

1.6.1) Limited data:-

This project has completed with annual reports; it just constitutes one
part of Data collection i.e. Secondary. There were limitations for primary
data Collection because of confidentiality.

1.6.2) Limited period:-

This project is based on five year annual reports. Conclusions and

Recommendations are based on such limited data. The trend of last five
year May or may not reflect the real working capital position of the
company

1.6.3) Limited area:-

Also it was difficult to collect the data regarding the competitors and their
Financial information. Industry figures were also difficult to get.

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2.0 Introduction:

It's a fact of any business; company needs capital to conduct business. Of course
the best way to obtain it is through sales. Sometimes, however, companies need
other, more immediate sources. Different sources may be appropriate for different
stages of growth. Start-ups often rely on family members, friends, venture capitalist
or local associates. Once companies have achieved a financial track record,
companies can turn to other sources such as Asset Based Lending or Commercial
Loans.

3.1) Types of Funding:

Broadly funding classified in to two categories i.e. Equity base funding and debt
funding. Following chart will explain about the types of funding.

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 Asset Based Financing:

Asset based lending has become increasingly popular as a means of financing

growth and providing working capital. Asset based financing is a general term
whereby a lender accepts as collateral the assets of a company in exchange for a
loan. Most asset based loans are financed against accounts receivable and less
often, against inventory since receivables are among the most liquid of a company's
assets followed by inventory. Receivables are favored by lenders since they are self-
liquidating in nature

Another type of asset based lending rapidly gaining popularity is factoring. Factoring
is defined as the purchasing of a company's accounts receivable on a non-recourse
basis. Asset based lending may be the best source for working capital for companies
in turnaround where traditional bank loans may not be available or for new and
rapidly growing companies where high levels of growth cause the business cycle to
outpace the collection of receivables.

 Long Term Debt:

Long term debt is one of the initial financing avenues a company should pursue.
Most long term debt takes on the form of a loan where the interest and part of the
principal are paid back in equal installments over the life of the loan. Some of the
sources for business loans include the following:
 commercial banks
 government sponsored loan programs
 small business investment companies
 private lenders

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3.2) What is Working Capital?

Apart from financing for investing in fixed assets, every business also requires funds
on a continual basis for carrying on its operations. These include amounts expenses
incurred for purchase of raw material, manufacturing, selling, and administration until
such goods are sold and the monies realized. Business transactions are generally
carried on credit with a number of days elapsing subsequent to the sale being
effected for realization of proceeds1. While part of the raw material maybe
purchased by credit, the business would still need to pay its employees, meet
manufacturing & selling expenses (wages, power, supplies, transportation and
communication) and the balance of its raw material purchases. Working capital
refers to the source of financing required to by business entities. On a continual
basis for meeting these needs.

Thus the need for working capital arises from the prevalence of credit in business
transactions, need to fund manufacturing and support and to account for the
variations in the supply of raw material and demand for finished goods.

3.2.1 Gross working capital:

Gross working capital refers to the firm’s investments in current assets. Current
assets are the assets which can be converted into cash within an accounting year
and include cash, short-term securities, debtors, bills receivable and stock
(inventory).

3.2.2 Net working capital:

Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills payable
and outstanding expenses.

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Net working capital can be positive or negative. A positive net working capital would
arise when current assets exceed current liabilities. A negative net working capital
occurs when current liabilities are in excess of current assets.

3.2.3) Characteristics of working capital:

 It is continually required for a going concern
 However, the quantum of working capital fluctuates depending on the level of
activity
 Working Capital is impacted by numerous transactions on a continual basis

The above characteristics render limit based financing from banks ideal for working
capital financing. This is because the client is charged interest only on the average
outstanding utilized and is saved with the bother of reinvesting short term surpluses
arising out of low working capital utilization at a point in time.

Further since the transactions of the business are generally routed through a current
account with a bank, availing a credit limit from the same bank is really convenient.
Thus, working capital requirements are generally financed through limit based
financing by banks.

Source of Working Capital:

The typical sources of working capital are summarized as below:

1. funds from operations (adjusted net income)

2. sale of non current assets:

 Sale of long term investments (shares, bonds/debentures etc.)

 sale of tangible fixed assets like land, building, plant, or equipments

 Sale of intangible fixed assets like goodwill patents or copyrights.

3. Long term financing:

 Long term borrowings

 Issuance of equity and preference shares.

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4. Short term financing such as bank borrowings.

Appraisal of Bank Finance:

The appraisal of bank finance for working capital involves the following steps:

(i) Estimation of the Level of Gross Working Capital

(ii) Estimation of the Level of Current Liabilities
(iii) Computation of Net Working Capital Gap
(iv) Computing the share of NWC Gap required to be brought by the
borrower as Margin.
(v) Computation of the Level of Bank Finance.

Estimation of Gross Working Capital

For a systematic and proper estimation of the gross working capital requirements of
a firm, it is essential to identify its various components and analyze them in detail
and for that it is important to understand the operating cycle.

3.3) Operating Cycle Theory:

To estimate the gross working capital requirements, the understanding of the

operating cycle is very important. The function of any trading unit is to procure
materials, process the same, sell the finished goods and realize money and utilize
the money so received, to procure material again and to continue the cycle all over
again. Thus, the process starts with purchase of materials required for the trading.
The process of purchase of material may take sometime due to the number and
nature of materials, transportation, etc. The materials once procured are made to
undergo the several processes, the duration of which may range from a day to
months. During this period, various materials etc. will be in different stages of
production in different forms. Besides, the cost of material, labour charges,
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electricity, water, rent. Etc. are also incurred during the period of processing. All this
requires funds/capital.

Once the goods are produced, it may not be sold immediately and it may have to be
stored in a go down for some days before they are sold. Storing of such finished
goods involves cost of material used in such finished products, labour and other
manufacturing expenses incurred in producing them, etc. It is not necessary that all
the goods will be sold in cash.

Some goods will be sold on credit. Till such time sale proceeds are not realized,
funds are blocked in such receivables. Finally, when the sales proceeds are realized,
the funds are again used to procure material, etc. as above and the whole
process/cycle starts all over again. The total time taken from the purchase of
material, till realization of sale proceeds is called the operating cycle and the amount
of capital/funds required to sustain this cycle is called the gross working capital.

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OPERATING CYCLE

Here the total operating cycle will be the summation of the entire period, for trading
house procurement of raw materials and production process would not be included
in to the operating cycle.
For a trading house as well as a producer is very important to understand as to how
many times the operating cycle repeats it self, this is quiet important while calculating
the Limit for raising finance especially working capital finance.

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 Calculations of Operating Cycle

Corporation Cycle Period

Manufacturing 20 + 15 + 2 + 30 + 60 127
Trading 30 + 60 + 20 110

 Calculations of Operating Cycle Reoccurrence

Corporation OC Period Reoccurrence

Manufacturing 127 365 2.87
Trading 110 365 3.31

 The General Formula used

For Calculating Credit Limit using Operating Cycle is:

= (L + T + U) C.
365

L = Lead period = 1st date to Date of shipment

T = Turn over period = Date of Shipment to Acceptance Date
U = Usance period
C = Consumption

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3.4) Working Capital Management

3.4.1) Inventory Management:

Inventories consist of stocks-raw materials, work in progress or finished goods-

waiting to be consumed in production or to be sold. The total balance of inventory is
the sum of the value of each individual stock line. Stock records are needed to
provide an account of activity within each stock line as evidence to support the
balances used in financial reports. A department also needs a system of internal
controls to efficiently manage stocks and to ensure that stock records provide
reliable information. Departmental financial reports show only the total inventory
balance. Analysts from outside the department can examine this balance by using
ratio analysis or other techniques. However, this gives only a limited assessment of
inventory management and is not adequate for internal management. Good financial
management necessitates the careful analysis of individual inventory lines. Inventory
management is an important aspect of working capital management because
inventories themselves do not earn any revenue. Holding either too little or too much
inventory incurs costs.

Costs of carrying too much inventory Costs of carrying too little inventory
 Opportunity cost of  Stock Our Costs
foregone interest;
 Warehousing costs;  Lost Sales
 Damage and pilferage;  Delayed Service
 Obsolescence;  Ordering Costs
 Insurance.  Loss to Quantity discounts.

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3.4.2) Account Receivable Management

Debtors (Accounts Receivable) are customers who have not yet made payment for
goods or services which the department has provided. The objective of debtor
management is to minimize the time-lapse between completion of sales and receipt
of payment. The costs of having debtors are:
 opportunity costs (cash is not available for other purposes);
 Bad debts.
Debtor management includes both pre-sale and debt collection strategies.

Pre-sale strategies include:

 offering cash discounts for early payment and/or imposing
 penalties for late payment;
 agreeing payment terms in advance;
 requiring cash before delivery;
 setting credit limits;
 setting criteria for obtaining credit;
 billing as early as possible;
 Requiring deposits and/or progress payments.

Post-sale strategies include:

 Placing responsibility for collecting the debt on centre that made the sale
 Identifying long overdue balances and doubtful debts by regular analytical
reviews
 Having an established procedure for late collections, such as:
1. A reminder; letter;
2. Cancellation of further credit;
3. Telephone calls;
4. Use of a collection agency;
5. Legal action

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3.4.3) Cash Management:

Good cash management can have a major impact on overall working capital
management.

The key elements of cash management are:

 Cash forecasting;
 Balance management;
 Administration;
 Internal control.

Cash Forecasting
Good cash management requires regular forecasts in order for these to be materially
accurate; they must be based on information provided by those managers
responsible for the amounts and timing of expenditure. Capital expenditure and
operating expenditure must be taken into account. It is also necessary to collect
information about impending cash transactions from other financial systems, such as
creditors and payroll

The Importance of Good Working Capital Management:

Working capital constitutes part of the Crown’s investment in a department.

Associated with this is an opportunity cost to the Crown. (Money invested in one
area may “cost” opportunities for investment in other areas.) If a department is
operating with more working capital than is necessary, this over-investment
represents an unnecessary cost to the Crown.

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Approaches to Working Capital Management:

The objective of working capital management is to maintain the optimum balance of
each of the working capital components. This includes making sure that funds are
held as cash in bank deposits for as long as and in the largest amounts possible,
thereby maximizing the interest earned. However, such cash may more appropriately
be invested” in other assets or in reducing other liabilities.

Working capital management takes place on two levels:

 Ratio analysis can be used to monitor overall trends in working capital and
to identify areas requiring closer management.

 The individual components of working capital can be effectively managed by

using various techniques and strategies.

When considering these techniques and strategies, departments need to recognize

that each department has a unique mix of working capital components. The
emphasis that needs to be placed on each component varies according to
department. For example, some departments have significant inventory levels;
others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part

of the department’s overall management. The needs of efficient working capital
management must be considered in relation to other aspects of the department’s
financial and non-financial performance.

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3.5) Balanced Working Capital:

The dangers of excessive working capital:-

 It results in unnecessary accumulation of inventories. Thus chances of
inventory mishandling, waste, theft and losses increase.
 It is an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bed debts results which adversely affects
the profit.
 Excessive working capital makes management complacent which
degenerates into managerial inefficiency.
 Tendencies of accumulating inventories tend to make speculative profits
grow. This may tend to make dividend policy liberal and difficult to cope with
in future when the firm is unable to make speculative profits.

The dangers of inadequate working capital:-

 It stagnates growth. It becomes difficult for the firm to undertake profitable
projects for non availability of working capital funds.
 It becomes difficult to implement operating plans and achieve the firm’s
operating target.
 Operating inefficiencies creep in it when it becomes difficult even to meet day
to day commitments.
 Fixed assets are not efficiently utilised for the lack of working capital funds.
Thus the firm’s profitability would deteriorate.
 Paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc.
 The firm loses its reputation when it is not in a position to honour its short term
obligations. As a result, the firm faces tight credit terms.
 An enlightened management should, therefore, maintain the right amount of
working capital on a continuous basis.

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3.6) Bank Financing for Working Capital:

Working Capital gap, can either be financed from own resources or by banks, for any
financial institution it is an issue of key importance to allocate resources in such a
manner that maximum returns can be fetched, also to acquire adequate and
lucrative resources is an issue of prominent concern.

Working Capital Finance of Adani Exports Ltd. (AEL)

An important aspect in working capital management is the financing of working
capital needs of the company. It is very important to see that the right sources and
right instruments of finance in line with the operational requirements are tapped.
These instruments should not only be useful. Working capital requirements at AEL
are mainly financed by a number of Commercial banks as a consortium.

These working capital requirements of Adani Exports are financed mainly by banks.
Banks and financial institutions fund this working capital gap at AEL through two
broad modes:

a. Fund based Limits

b. Non Fund based Limits

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3.6.1) Fund based Limit:

Fund based limits can be categorized as sources of actual finance. Here banks
allocate certain fund towards the borrower or forwards certain credit to the borrower.

Fund based limits consist of various lending facilities:

1. Term Loans
2. Working Capital Term Loans
3. Cash Credit / Overdraft
4. Discounting of bills.
5. Pre shipment Credit
6. Export Packing Credit

1. Term Loans:

Term Loans are generally taken to acquire capital assets. The repayment is in the
form of either installments (Actual + Interest) or EMI. Repayment of Term Loan is
through future earnings from the Capital Asset acquired. The purpose of the term
loan is defined well in advance.

2. Working Capital Term Loans:

When contribution to working capital has to be brought immediately; working capital

term loans are used. Generally organizations availing working capital limits under the
second method of financing use working capital term loan as a source of quick
finance. The interest rate applicable is around 1% higher then the cash credit
account. Working capital term loans are financed on the basis of recommendation
by Tandon committee.

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3. Cash Credit Facility:

Cash Credit Facility is generally granted under the running account facility. Availed
for maintenance of inventory and day to day business activities;
Cash Credit Facility, or CC limit is generally used to meet a major part of working
capital requirement. Cash Credit Facility can broadly be bifurcated in two segments.
1. Cash Credit – Pledge
2. Cash Credit – Hypothecation

Cash Credit – Pledge

 Credit is advanced against goods which are in the possession of the
bank.
 The charge of the bank in such cases is on specific goods pledge to
the bank.
 The movement of goods is under the inspection of bank.
 The borrower faces certain operational problems.

Cash Credit – Hypothecation

 Credit is advanced against goods which are in the possession of the
borrower.
 A floating charge over the stocks is created in favor of the bank.
 The borrower has to submit regular stock statements to the bank.
 The charge of the bank is not towards any specific goods but towards
the entire stock.

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4. Discounting Of Bills:

A borrower obtains credit from banks against the bills he possesses. The bank here
discounts the bill i.e. purchases the bill after analyzing the credit worthiness of the
drawer. The borrower gets discounted amount of the bill.
(Full amount of bill – Discount charges of bank) = Discounted amount of bill.

5. Pre – Shipment Credit:

All credit facilities sanctioned to exporters for producing / manufacturing /

processing / packing / warehousing / shipping the goods for exports are termed as
“Pre-Shipment Credit”.
The credit limits for pre-shipment advance are considered simultaneously along with
other facilities and it is generally made a sub-limit within the overall cash credit limit
sanctioned to the borrower. The assessment of working capital requirement may be
based upon the export orders on hand with the exporter besides his capacity to meet
that commitment. The exporters, to whom this facility is allowed, will be required to
produce letters of credit/firm export orders within a reasonable period of time. Pre –
Shipment Credit limits can be extended through the running account facility.
No repayment of pre-shipment advance can be effected from local funds in which
case the advance will not be treated as 'pre-shipment advance' and no benefits of
concessional rate will be available to such an advance from the date of original
advance. Quantum of advances and interest rate structure is based on the
commodity to be exported and the current PLR.
Advance is granted for a period of 180 days and if the export is not executed by that
time a further extension of 90 days can be given.

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6. Export Packing Credit:

Packing credit may be taken as equivalent to 'cash credit' in domestic business

except that cash credit facility is sanctioned as a continuous/running facility whereas
packing credit advance is disbursed for a specific purpose to enable the exporter to
meet a specific export obligation. The procedure and techniques adopted by bank
are same as other advances.
The repayment of packing credit advance can be only from the proceeds of the bills
drawn under the export order/L/C against which the pre-shipment advance was
granted to the exporter by the bank. Packing credit advance will be treated as a
separate loan and no running account facility will be permitted. The repayment of
packing credit account will also be required to be done on separate loan account
basis.
Advance is granted for a period of 180 days and if the export is not executed by that
time, the export should be completed within 360 days. Quantum of advances and
interest rate structure is based on the commodity to be exported and the current
PLR.
The packing credit may initially be clean at the time of disbursement; may be
covered by hypothecation charge over the raw material, semi-finished and finished
goods later; hypothecation charge be converted to pledge of finished goods meant
for exports or may even be covered by document of title to goods (LR/RR) if the
goods are sent for shipment to a port city.

ECGC Guarantee
Most of the banks cover their packing credit advances under 'Packing Credit
Guarantee' of Export Credit Guarantee Corporation of India Ltd. (ECGC). ECGC
issues packing credit guarantees on each exporter individually and also has the
system of issuing a guarantee in favor of the bank on whole turnover basis. Premium
on the guarantee is generally recovered from the exporter. The rates of premium on
individual guarantees are higher in comparison to rates on 'Whole Turnover Packing
Credit guarantee' issued to banks.

It is necessary to obtain this information from the bank as cost of additional premium
for individual guarantee may sometimes be quite heavy depending upon the turnover

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in the account. Guarantees issued by ECGC are in addition to various policies

issued by ECGC in favor of exporters to cover the risk of non-payment or other
political risk involved in export trade. Full details of these policies may be obtained
from any office of ECGC.

3.6.2) Non Fund Based Facilities:

Credit facilities, which do not involve actual deployment of funds by banks but help
the obligations to obtain certain facilities from third parties, are termed as non-fund
based facilities. Non Fund Based Facilities are a sort of written under taking given
by the bank on behalf of the purchaser.

The Non Fund Based limit facilities include two modes of finance.
1. Letter of Credit
2. Bank Guarantee

1. Letter Of Credit:

Letter of credit is a method of settlement of payment of a trade transaction. A LC is a

bank's promise to pay a seller on behalf of a buyer, provided the seller meets the
terms and conditions stated in the credit. Banks act as intermediaries & have no
actual contact with the goods bought & sold. The LC serves as a guarantee that the
buyer will receive the merchandise specified goods and then the seller will be paid in
a timely manner. Each LC transaction generally involves four parties:

 The two parties to the transaction (buyer and seller)

1. Buyer
2. Seller (Beneficiary)

 The bank for each of these parties

1. Issuing Bank
2. Advising Bank

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The LC transaction occurs between two parties at a time: buyer and seller, buyer
and issuing bank (which authenticates the credit & manages the LC process on
behalf of the seller), advising bank & seller.

Letter of Credit are used for risk control, various protections availed because of LC
are
1. To Protect Against Seller Risk
2. To Protect Against Buyer Risk
3. To Protect Against Country Risk
4. Exchange Control Regimes
5. Import Control Regimes

Letter of Credit faces several problems during negotiation as well as execution.

These problems are both natural and human errors; because of these errors delay in
sanctioning of limit often takes place. Process of LC has been explain in details in
Annexure - 1

2. Bank Guarantee:

Section 126 of Indian Contract Act 1872 defines a contract of guarantee as “a

contract to perform the promise or discharge the liability of a third person in case of
his default.”

 Parties to the contract of Guarantee-

 Applicant – The principal debtor-person at whose request the
guarantee is being executed.
 The beneficiary – Person to whom the guarantee is being given and
who can enforce it in case of default.
 The Guarantor – The person who undertakes to (surety) discharge the
obligation of the applicant in case of his default.

 Necessity for Bank Guarantee (B.G)

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Applicant (A) and beneficiary (B) have a business contract. This is the primary
contract. ‘B’ wants to cover against the risk of any non-performance of the
contract by ‘A’. So ‘B’ can ask for a monetary deposit as a cover.
‘A’ is not willing to block his money. So, ‘A’ approaches his Bank with a request to
issue a B.G. in favor of ‘B’. Thus there arises the need for a bank guarantee.

 Types of Guarantees
1. Ordinary Guarantee
 Financial: Guarantee the customer’s financial worth, creditworthiness,
and his capacity to take up financial risks.
 Performance: The guarantee obligations relate to the technical,
managerial, administrative experience and capacity of the customer
(applicant).

2. Deferred Payment Guarantee:

 These guarantees come into play when equipments involving large
outlay of money are required.
 A system of deferred installments of the price is evolved. Therefore the
need for a Bank Guarantee i.e. Deferred Payment Guarantee.

3.7) Process of working capital financing from banks:

The financing limits are granted based on assessment of the working capital
requirement. The assessment factors include various characteristics such as the
nature of industry, industry norms, actual level of activity for the previous year and
the projected level of activity for the subsequent year to arrive at the working capital
requirement. The bank financing limit is thereafter decided on the base of factoring in
margins on the different types of current assets forming part of the working capital.

The Bank Financing Limit is fixed on an annual basis. However, since such limit is
provided to meet specific requirements, utilizing the limits is subjected to the Drawing
Power, which is decided on a monthly/ quarterly basis.

The effective bank financing is therefore to the extent of the lower of:
30
 Working Capital

 Bank Financing Limit: Determined on an annual basis based on an

assessment of the current year’s projections and the actual for the previous
year.
 Drawing Power: Linked to the quantum of current assets (and current
liabilities) owned by the business with appropriate margins. Fixed on a
monthly/ quarterly basis depending on the submission of Monthly/Quarterly
Information System returns indicating the position of the stock statement,
receivables, Work in Progress, payables, etc.

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

 Application for the working capital

Most of the large commercial banks are moving towards the trend of specialized SSI
branches near the industrial concentrations. The applications for working capital are
generally accepted and processed at these branches.

 List of Documents accompanying the application

The application for working capital would need to have a covering letter containing a
request for sanction of working capital limits. The following documents would need to
be enclosed along with:

o Detailed Project Report containing the detailed financials at projected

levels of operations for the next 5 years
o Memorandum and Articles of Association
o Copies of Incorporation documents (relating to formalities with the
Registrar of Companies in case of corporate)
o Statutory approvals obtained/ applied for such as for power, water,
pollution control, environment clearance, clearances from other
agencies/ departments with purview over the business.

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 Working Capital

o Other relevant documents – Letters of intent/ confirmed orders from

prospective buyers.
o Networth statement of promoters.

In case of the larger loans (above Rs. 5 crore in case of most banks), the projections
are generally submitted in the CMA format prescribed by Reserve Bank of India
(earlier mandatory).
 

 In- Principle Sanction for Working Capital

The timeframe for in-principle sanction depends upon two factors:

o Time taken for submission of necessary documents

o The decision structure at the bank

Most of the large banks have specialized SSI branches at the industrial
concentrations in the country. These branches are headed by senior executives
often with sanctioning power of Rs. 5-6 crores at the branch. In such instances,
delays for processing the applications at the bank are limited. In fact the stage of in-
principle sanction maybe dispensed with and final sanction accorded on full
appraisal.

In other cases, such processing may take 30-45 days for according In-Principle
Sanction to the project. The newer private sector banks are generally faster in
according such approval. The significance of the in-principle sanction of working
capital is that such sanction is necessary for obtaining term funding from the financial
institutions. While these financial institutions accord sanction to a industry,

 Appraisal and Final Sanction:

The appraisal and final sanction of the request for working capital is based on a
thorough appraisal of the Detailed Project Report (DPR). The traditional banks
generally have specified formats for submission of the DPR. The usual coverage of
the DPR includes:

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 Working Capital

o Overview of the business

o Background of promoters
o Details of products to be manufactured – manufacturing process and
raw material
o Market overview and competition Sensitivity Analysis – ‘What if’ on
Finished Goods prices, raw material costs and so on
o Detailed financial projections covering the Balance Sheet, Profit and
Loss Account, Funds Flow and the Financial Ratios.

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

 Post Sanction Requirements

Post sanction requirements involve completion of documentation creating a

charge in favour of the bank. This could include a charge on assets related to
the business and charge on collateral offered (if any). The financing facilities
sanctioned can thereafter be availed by the borrower.

 Monitoring and follow-up

Working capital financing is extended for the current asset build up of a business,
which is linked to its activity level. These assets are mobile (in case of inventory) and
also easily convertible into cash. At best, the banks have a second charge on the
fixed assets of the enterprise and without the power of Seizure (u/s Sec 29 as
available to the state financial institutions) realizing money from the security is time
consuming. Hence, banks pay extremely high importance to the monitoring and
follow-up of the loan.

The system of a current account through which all the transactions are routed acts
as an in-built check on the operations of the borrower. By studying the current

33
 Working Capital

account transactions in detail, the banker is able to make an assessment of the

business. In addition to this, the banks also undertake other forms of monitoring.

These include:

 Stock Statements collected on a monthly basis from the borrower.

 Quarterly Operating Statement giving details of the operations for the quarter

In addition to these checks, banks often employ methods such as:

 Stock Audit by independent firms of chartered accountants.

        This would involve a visit to the storage areas of the borrower, visual inspection
and scrutiny  of the stock statements at the spot. Cross-checking these with the
statements given by the client would provide a means of check.

 Branch Inspection conducted by the internal audit/ bank staff

In case of larger loans, Consortium meetings where the operations of the unit are
jointly reviewed are also undertaken.

 Review, enhancement of limits and adhoc limits

        Review of limits is usually undertaken on an annual basis. In cases where a

request for enhancement of limits is made by the borrower during the course of the
year, such a request is processed based on the stock statements and QoS
submitted. In case of temporary need, an adhoc limit of upto 25% of the existing
limits could be granted on request.

34
 Working Capital

3.8) Standard Formulae for determination of Working Capital:

The issue of computation of working capital requirement has aroused
considerable debate and attention in this country over the past few decades. A
directed credit approach was adopted by the Reserve Bank of ensuring the flow of
credit to the priority sectors for fulfillment of the growth objectives laid down by the
planners. Consequently, the quantum of bank credit required for achieving the
requisite growth in Industry was to be assessed. Various committees such as the
Tandon Committee and the Chore Committee were constituted and studied the
problem at length.

Norms were fixed regarding the quantum of various current assets for
different industries (as multiples of the average daily output) and the Maximum
Permissible Bank Financing (MPBF) was capped at a certain percentage of the
working capital requirement thus arrived at.

Working Capital assessment on the formula prescribed by the Tandon Committee.

Working Capital Requirement (WCR)= [Current assets i.e. CA (as per industry
norms) – Current Liabilities i.e. CL] Permissible Bank Financing [PBF} = WCR –
Promoter’s Margin Money i.e. PMM (to be brought in by the promoter)

As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA – CL]
As per Formula 2: PMM = 25% of CA and thereby PBF = 75%[CA] – CL

As is apparent Formula 2 requires a higher level of PMM as compared to Formula 1.

Formula 2 is generally adopted in case of bank financing. In cases of sick units
where the promoter is unable to bring in PMM to the extent required under Formula
2, the difference in PMM between Formulae 1 and 2 may be provided as a Working
Capital Term Loan repayable in installments over a period of time.

Illustrative Example:
Turnover of a manufacturing unit: Rs. 750 lakh p.a (assumed uniform across the
year)
Assumed value addition norm: 50% (i.e. cost of raw material = 50% of Realisation)

35
 Working Capital

Promoter Projections

Current Assets Rs in lacs Current Liabilities Rs in lacs

- Raw materials  50  - Payables  35

- Work in progress  25

- Finished Goods  60

- Receivables  125

Requirement assessed as per norms applicable for the industry:

Industry Amount as Promoter Applicable

Particular Norm (a)  per Norm (b)  Projection (c) norm (d)
Current Asset  Rs in lacs Rs in lacs Rs in lacs

- Raw material  1 month  31.25 50 31.25

- Work in Progress
(assumed at 50% 10 days  15.62 25 15.62
complete) 
- Finished Goods  15 days  31.25 60 31.25
- Receivables 
1.5 months  112.50 125 112.50
 
190.62 260.0 190.62
Current Liabilities
- Payables  15 days  18.80 35 18.80

Working Capital
171.82   225.0   171.82
Requirement  

  Notes:

 Assumptions here include: No export turnover, uniform working capital

requirement through out the year
 Industry norms have been specified in the Tandon Committee Report for
all important industry categories
 Raw materials have been valued at cost of raw material (assumed at 50%
of realization)
 Work in progress has been valued at 50% complete basis

36
 Working Capital

 Applicable norm (d) is the more conservative of (b) or (c) from the bank’s
point of view.

Computation of working capital requirement

Working Capital Requirement arrived at therefore is Rs. 171.82 lakh

Formula 1
PMM (Promoter Margin Money) as per formula 1 = 25% of 171.82 lakh = Rs. 42.95
lakh ~ Rs. 43 lakh
Hence, Permissible Bank Finance 1 = Rs. 129 lakh

Formula 2
PMM as per formula 2 = 25% of Rs. 190.6 lakh = Rs. 47.65 lakh
Permissible Bank Financing as per formula 2 = [75% of 190.6 lakh – Rs. 18.8 lakh ]
= Rs. 124.1 lakh

The difference between the 2 methods is Rs. 4.90 lakh (which maybe extended as a
Working Capital Term Loan in case of sick units.

Thus the PMM while being at 25% of the Working Capital requirement 1  could
actually translate to as high as Rs. 225 lakh – Rs. 124 lakh i.e. Rs. 101 lakh
assuming that the promoter projections really reflect his genuine need for working
capital. It should however be understood by the entrepreneur that he ought to keep
his working capital requirements to the minimum (whether or not bank financing is
available) to ensure that his interest burden and capital blocked is kept to the
minimum.

The following further points maybe worth mentioning here:

 In case of export financing sought by the entrepreneur, the quantum of bank

financing for the Working Capital build up for this purpose would normally be
at a higher percentage
 Within the overall limits, there could be sub-limits for bills financing (in case of
receivables) with the result that such limits might not be fully available to the
business.

37
 Working Capital

 The Bank Financing Limit arrived above is the Overall limit for the year. The
actual quantum of bank financing that could be availed by the unit at a given
point in time depends upon its drawing power based on its periodical returns
filed to the banker.

3.9) Consortium Bank Finance:

When more than one bank joins hands to finance the credit requirements under
participation arrangement to a corporate borrower, it is called Consortium Advance.
The participation of banks enable them to pool their talent and resources to take
credit risk on large scale and to apply uniform standards, terms and conditions etc. in
regard to a credit proposal.

Following points may be kept in mind to understand consortium:

(i) Two or more banks join in financing one borrower for working capital.
(ii) Two or more banks and/or financial institution/s join in financing fixed
assets.
(iii) In the case of a borrower with different units (each one engaged in
separate line of production), each unit is financed by a separate bank or by
a sub-consortium of banks under the consortium of banks for the borrower
as a whole. Under the consortium arrangement, it is expected that the
participating banks acquire common interest, share the advance and same
security on predetermined proportions. Every consortium will have a
leader.

Here, one bank acts as the lead bank or the leader of the consortium, while other
banks are the participating members. Guide lines and rules for governing the
consortium and activities of the same are framed by RBI as well as the member
banks of the consortium. The requirement of the borrower is generally so huge that
one bank individually cannot meet it, thus, various banks come together to fulfill
these requirements. It is upon the borrower and member banks to decide up on
banks entering or leaving the consortium. Banks finance the borrower as per the %
sanctioned to them by the consortium, minimum being 1.50% although the same can
be decided by the consortium.

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 Working Capital

Certain key aspects of financing working capital through consortium banks are:

Parameter RBI Guide Lines At AEL

Number of Members: 10 to 12 (average) 16

Documentation: Single window

documentation prepared by Done by SBI, which is
the lead bank the lead bank

Additional Ad-hock No other bank to be allowed

Requirements: to provide finance In Banks with in the
situations of contingent consortium provide
requirements, consortium to such financial
provide such finance requirements

Financing above % A bank can finance over its

decided: existing limits only when any As per the sanctions of
other bank can not finance SBI, and requirements
its share. of AEL
Permission from lead bank is
required.

Multi divisional Financing: Consortium should finance

all the divisions of the
borrowers entity

Rate of Interest: Rate change because of

change in PLRs should not
vary largely from the Rate as per effective
Effective rate of interest rate as decided.

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 Working Capital

3.10) Ratio Analysis for Working Capital Assessment:

Ratio analysis involves establishing a relevant financial relationship between

components of financial statements. It helps in identifying significant relationship
between financial statement items for further investigation.

As far as working capital assessment and appraisal is concerned, ratio analysis

plays a very important and crucial role in establishing the financial view point. Thus,
analyzing and evaluating certain key working capital ratios are of key importance for
assessment of Working Capital requirements.

Banks determine the credit worthiness based on several ratios, thus, it is of an

unavoidable requisite to study the working capital ratios and their applications.

Working Capital Ratios 2000-01 2001-02 2002-03 2003-04 2004-05

   
Net Working Capital
Turnover 3.09 3.136 3.27 8.12 9.54
   
Creditors Ratio 74 86 95 42 41
   
Debtors Ratio 120 127 133 57 44
   
Inventory Ratio 17 9 13 8 7
   
Operating Cycle Ratio 63 50 51 23 10
   
Debt Equity Ratio 1.25 1 0.29 0.47 0.96
           
Source: Economic Times (web site) & Provos database

40
 Working Capital

Sales
Net Working Capital Turnover Ratio:
Net current asset

Net Working Capital Turnover

Net Working Capital Turnover

10
10 9
9 8
8 7
7 6
6 5
5 4
4 3
3
2
2
1
1
0
0 2000-01 2001-02 2002-03 2003-04 2004-05
2000-01 2001-02 2002-03 2003-04 2004-05

 2000-01 2001-02 2002-03 2003-04 2004-05 

3.09 3.136 3.27 8.12 9.54

The above ratio shows net working capital turnover from the year 2001-2005, the
year 2001 had the net working capital ratio 3.09 times, actual working capital means
combination of net working assets and investment from the total Assets turnover
during the year. Than the company used next year total working capital has
increased 3.43 times but in 2003 the total turnover of company reduced than and
that why the working capital was reduced 3.27 and than in the year 2004 the total
working capital increased due to increased in the efficiency of sales turnover as
same way the total sales turnover still increased in the year 2005 but as we show
from sources total fixed capital increased for purpose of expansion, the working
capital was only 9.54 times.

41
 Working Capital

360 days
Creditor’s Ratio:
Creditor’s turnover

Creditors Ratio

100
90
80
70
60
50
40
30
20
10
0
2000-01 2001-02 2002-03 2003-04 2004-05

 2000-01 2001-02 2002-03 2003-04 2004-05 

74 86 95 42 41

The ratio above shows the credit period days allowed to the creditors by the
company, in the year 2001 the creditor’s ratio was for 74 days this is a high rate and
may result in to impending certain financial burdens on the company maintaining the
credit period. In the next as well the period is considerably high at 86 days. In the
year 2004 the company’s business expanded and company preferred lesser day to
for creditors because payments came regularly against given credit. In the year 2005
it was only 41 days so as good for MNC company concern.

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 Working Capital

360 days
Debtor’s ratio :
Debtor’s turnover

Debtors Ratio

140

120

100

80

60

40

20

0
2000-01 2001-02 2002-03 2003-04 2004-05

 2000-01 2001-02 2002-03 2003-04 2004-05 

120 127 133 57 44

The debtors ratio is of a very keen importance for an organization as debt receivable
is a main constitute for completion of the operating cycle, and payment made by the
organization. Although there has been a steep increase in the debtors ratio till year
2002-03, with the increased standardization and smoothening of policies, the debtors
ratio has come considerably down and low to a low of 44 from a high of 133 in a
shorter span, this shows the company’s stand on its debts receivable management.

43
 Working Capital

360 days
Inventory Turn over Ratio :
Inventory turnover

Inventory Ratio

18
16
14
12
10
8
6
4
2
0
2000-01 2001-02 2002-03 2003-04 2004-05

Above chart shows the inventory in hand of company for a particular period of time,
in the year 2001 the company had 17 days for inventory handling ratio, it means
company’s transaction was very fast and company was good at its core business
trading, that have less inventory on hand, than in the year 2002 9 days was ratio of
inventory in that particular year the total turnover was much lower that is why
company could not perform good trading in the year 2002, in 2004 the company
expanded its business and did record trading so some how inventory days increased
to 8 days in the next year even company made double turnover than the previous
years so just increased days 7 of handling inventory on hand .

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 Working Capital

Debt equity : Total capital employed

Net worth

Debt Equity Ratio

1.4

1.2

0.8

0.6

0.4

0.2

0
2000-01 2001-02 2002-03 2003-04 2004-05

 2000-01 2001-02 2002-03 2003-04 2004-05 

63 50 51 23 10

This ratio indicates the portion as debt compared to equity. The general or standard
debt-equity ratio is 2:1 equity; maximum Rs. 2 debt fund can be raised against equity
of Re. 1/-.

From the above chart it can be visualized that the company has maintained a
reputed as well as healthy debt-equity ratio. In all these years it never exceeds the
said limit, but here in beginning the ratio was just 1.25 in 2001, than in 2002 it
reduced to 1 moreover in the next year it reduced at its bottom level due to poor
financial position of company just 0.29 in the year 2003, then in the year 2004 it
increased to 0.47, and at finally in 2005 it gains handsomely towards positively 0.96.
This clearly shows the developing trend coming back to the company.

45
 Working Capital

Operating Cycle

Operating Cycle Ratio

70
63
60

50 50 51

40

30
23
20

10 10

0
2000-01 2001-02 2002-03 2003-04 2004-05

Operating cycle means the difference between the debtor’s payment period, creditor
period, and inventory days; that is the period of payment between all of them. This
ratio is very important for any organization as this clearly shows the days required by
any organization to complete its trading cycle and also gives intuitions about
commencing the new cycle

Here in the year 2001 the operating cycle was for 63 days it means that company
had made all payment and have to receive the same payments as per terms with in
that 63 days, than it seems long terms for the payment of the transaction, in the next
year it reduced to 50 days but in next year when trading was lowest that company
had the cycle of 51 days it shows the typical situation , but the company became
aware at higher stage of that trading level when business expand company had only
23 days period for operate payment of business, than in 2005 on large scale of turn
over the company

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 Working Capital

3.11) Credit Rating Policy and Principles:

Banks use credit rating to analyze the credit worthiness of any proposed customers
(borrower). And then based up on the credit rating and the risk appraisal the bank
decides up on the rate on interest or the charge to be levied up on a particular
finance. Thus, it is an issue of key concern for any organization to understand the
norms based up on which the banks frame this credit rating policy. Credit Rating
agencies both internal as well as external, pay keen interest and base to certain
macro as well micro environmental elements, this is basically because of the fact
that not just the financials but also the economic and non economic environmental
factors determine the over all credit worthiness of any financial organization, a few of
these most crucial elements are:
 Management
 Institutional Arrangement
 Capital Adequacy and Asset Quality
 Resources
 Operational Effectiveness
 Scalability and Sustainability
 Transparency & disclosure
 Value Creation and distribution

Banking organizations also look in to various risk and credit policies before framing
their policies. The main concern of any bank before framing the credit ratings is to
analyze and achieve a perfect customer (borrower) whose credit worthiness would
be sound enough to avoid the NPA or risk coherence of the lending. Credit Ratings
most of give ranks or grades to institutions and organizations based up on their
financial and economic feasibility, thus for any organization it is an issue of keen
consideration to understand the credit rating policy of any banking organization.
Other than this key issues considered while framing a credit rating policy for any
banking organization contain the following details:

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 Working Capital

 Ratio Analysis
1. Current Ratio
2. Debt Equity ratio
3. Return on Net Worth
4. IRR
 Statements and Financials
1. Quarterly Information Statements
2. Financial Data as asked for
3. Renewal note and data
4. Projects of Sales and Profits

Calculations of Credit ratings :

A technique used to develop a measurement of solvency. For example, Edward
Altman developed a Z score formula that was able to identify bankrupt firms
approximately 95% of the time using discriminant analysis.

Altman Z Score formula

EBIT sales market value of equity

Z=3. 3 +1. 0 +.6
total assets total assets total book debt

retained earnings working capital

+1. 4 +1 .2
total assets total assets

Suppose that we were trying to determine whether a small company was a good
credit risk and computed the following ratios:

EBIT retained earnings

=1. 2 =. 4
total assets total assets

sales working capital

=1. 4 =. 12
total assets total assets

market equity
=. 9 48
book debt
 Working Capital

If the Altman Z score cut off for a credit worthy business is 2.7 or higher, would we
accept the following client?

Firm's Z Score
(3.3 x.12)  (1.0 x1.4)  (.6 x.9)  (1.4 x.4)  (1.2 x.12)  3.04

A score above 2.7 indicates good credit.

4) Findings and Learning outcomes:

All throughout this project, there were several learning experiences, both on floor
and off floor, based up on those learning experiences, certain findings and
suggestions have been laid. It is not possible to list all those valuable information
and knowledge gained from the project, but some of the corporeal knowledge
acquired is listed below:

Findings:

 To finance their major working capital requirements, organizations prefer

banking solutions to other options as they are more economic and easily
available.
 Thus know how of various lending policies, credit policies and risk structures
of various banks are extremely essential.
 For assessment of the working capital requirements companies follow a
specific regime of process, ranging from collection of information to planning
to budget to preparing financials for the required funds.
 Forecasts and budgets play an important role in identifying working capital
requirement.
 Out of the 2 popular methods of lending, banks prefer lending working capital
loans through MPBF, Method II, because of its extensive cover over the entire
current assets; this provides the bank an extended coverage and security.

49
 Working Capital

 Working capital requirement is so derived that in terms of certain special

circumstances like futuristic demand, new opportunities or slack, these limits
can be flexed as per the requirements. This reduces the burden of the
company as well as the bank.
 At AEL, working capital requirement and working capital management are
given a prime importance because of the nature of the business that is
trading, where all the constituents of working capital management, i.e.
inventory, cash and debtors play a crucial role.
 Because of its flexible business policy, and readiness to enter in to new
horizons of opportunities, AEL and Adani Group, always need ample working
capital, this need is equally supported with proportionate current assets and
current liabilities.

Learning Outcomes

The two month internship spent at Adani Exports Ltd. has been very informative.
It has given me a very good idea about the corporate culture which is very
different from the student culture. This would help me to get adjusted to the
corporate culture easily in the future.

The internship program has helped me in understanding the practicality of class

room learning and also I applied the theoretical concepts in my organization. The
two months spent in India’s premier Trading House has helped me gain
knowledge about how an organization works i.e. flow of information,
assignment of work, etc.

Important lessons I leant from this two months internship are, importance of
communication skills, punctuality and integrity in the corporate world. Being a
part of big organization for two months, it has given me lot of self confidence. I
have understood the meaning of patience and understood how it helps to build
one’s career. I have tried my best to understand technicalities and mechanism of
various types of Financing in Imports-Exports business.

50
 Working Capital

5) Suggestions:
Adani Exports Ltd. is going on the right direction from its date of establishment. It has
achieved many milestones in the shorter span of business. Also company have
strong future plan of diversified the business as well as product mix. As the there is
no such problem is given for the study, so there is no special suggestions. Following
suggestions are on the base of observations made during the course of internship
which may help AEL for better governance.

 The company should use packing credit in foreign currency instead of Indian
currency loans. In comparison to Indian currency bills, the company should
discount foreign currency bills quickly to restrict itself from the foreign
currency exposure
 Regular and diligent meetings with lenders and especially bankers can
increase the understanding of both the parties, and can reduce
misconceptions as well both the parties can easily understand each other’s
demands and requirements.
 Application of international rules for accounting and analysis should be
adapted, adhering to credit ratings and formulating requirements in line with
the Basel II rules can reduce the gap between banks assessment and the
company’s assessment.
 Company should use correct mixtures of Fund base and Non-Fund base
finance to meet up its working capital requirement. Thus company can reduce
its interest expenditure.
 The company should make the operating cycle more effective, this can be
done by reducing the stand on time, or the holding period of goods, because
of this, the remittance of cash and cash receivables can be increased
resulting in to lesser debtors and a smooth cash cycle.

51
 Working Capital

6) Scope for Further Research:

1. As the concept of “trading house” is still new to the industry, more

aspects could come into picture as soon as the government promotes
more exports. .

2. Risk attached to Trading business increased day by day. Thus it is

necessary to create new hedging theories and minimize the risk.

3. There are many way of financing the trading business. Thus it is

important to do further research to finding out the cost of capital in
each option.

4. Working Capital is basic requirement for any business. There is a still

un-touched area such as to calculate the correct requirement of
working capital.

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 Working Capital

7) Conclusions:

To conclude this project on Business analysis and working capital seems to be a

new beginning, towards analyzing the fund management done by corporate,
constituting of analyzing fund requirements, identifying the probable sources of
funds, performing credit appraisal for procurement of funds and finally delegating
and acquiring the funds.

After the LPG (Liberalization - Privatization – Globalization) trade activities in India

increased rapidly. Adani exports grab this opportunity and optimized it. Moving with
changes today Adani have more than 40 products in their product mix, which is back
bone of the success it achieved in shorter span.

Assessment of working capital requirement and procuring funds as working capital is

a very regulated and standardized objective of both the lender and the borrower, with
involvement of several committees, ranging from the Tandon Committee to the latest
Basel II norms set by the Basel Committee, guidelines for working capital
assessment have been specified there in. Still several issues lay within the authority
of the bank and the borrower, in this situation the borrower tries to avail maximum
benefit with maximum flexibility to achieve a safe capital basis, where he can easily
balance his current assets and current liabilities.

To conclude it can be said, that for proper assessment of working capital

requirements know how of budgeting, forecasting, market conditions, sources of
funds, assessment policies, credit policies and risk structures of banks and RBI, as
well as a personal rapport with the lenders is extremely essential, a mix of this can
result in to easy assessment and procurement of funds.

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 Working Capital

Bibliography

• www.economictimes.com

• www.businessstandards.com

• www.moneycontrol.com

• www.wikipedia.com

• www.realmarket.com

• www.google.com

54
 Working Capital

Glossary:

 L.C - Letter Of Credit

 FBP - Foreign Bill Purchase

 PCL - Peaking Credit Limit

 FCL - Foreign Currency Loan

 WCDL - Working Capital Demand Loan

 TL - Term Loan

 FBD - Foreign Bill Discounting

 IBD - Inland Bill Discounting

 IBP - Inland Bill Purchases

 MPBF - Maximum Permissible Bank Finance

 B.G. - Bank Guarantee

 ECGC - Export Credit Guarantee Corporation

 FB - Fund Based

 NFB - Non Fund Based

 Fx - Foreign Exchange

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