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Gross Working Capital= Current Assets Net Working Capital= Current Assets- Current Liabilities
Current assets are the assets which can be converted into cash within one
year and include cash, short-term securities, debtors, bills receivable and inventory.
Current liabilities (CL) are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses.
Current Assets Cash Other short-term financial investments Accounts receivable Inventories Total current assets Rs.26285.89 155962.85 29180.15 16957.65 173214.88 63028.27 Rs.527089.87 Rs.291414.81 Rs.74651.53 30125.67 249097.79
Current Liabilities Current portion of long-term debt Accounts payable Income tax provisions Dividend Provisions Other current liabilities Total current liabilities
Net working capital (current assets - current liabilities) = 527089.87 - 291414.81 = Rs.235675.06 crores
Nature of business Market and demand Technology and manufacturing policy Credit policy Suppliers credit Operating efficiency Availability of Raw Material Inflation
Operating cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases:
Acquisition of resources such as raw material, labour, power and fuel
etc.
Manufacture of the product which includes conversion of raw
Creditors or payables deferral period (CDP) is the length of time the firm is able to defer payments on various resource purchases.
Raw Materia
Service
Trade
Industry
Finished Goods
Receivables
Stocks
Own funds
Trade Credit, Outstanding Expenses, advances from customers Bank Finance
Cash Credit
Overdraft Shot term Loans
Bills Discounting, Factoring & Forfaiting Money Market Instruments: Call Money, Notice Money, Commercial Paper & Certificate of Deposits
Calculate Maximum Permissible Bank Finance according to three methods of Tandon Committee (Core Current Assets are of Rs 95)
Current Liabilities Creditors Amount 100 Current Assets Raw Material Amount 200
50
100
Stock in Process
Finished Goods
20
90
Receivables
Other Current Assets 250
50
10 370
MPBF 1
Companys Contribution
MPBF 2
MPBF 3
25% of CA + all core CA should be from long term source
At least 25% of 25% of CA should Working Capital be from long term Gap (CA- CL source excluding bank Lending) should be from long term source
MPBF
0.75 (CA-OCL)
0.75 CA-O CL
In April 1979, Committee under Chairmanship of Mr. K B Chore for gap between
sanctioned limit and utilization.
Recommendations
Review of limits once in a year No Bifurcation of cash credit accounts Separate Limit for peak level and non peak level Excess/ under utilization (more than 10% on either side) considered as defective planning. Penal interest of 1%
No frequent sanction of Ad Hoc or temporary limits 2nd Method of MPBF compulsory for companys with limit more than Rs 50 lakhs Encourage Bill Finance
Statement showing forecast of cash receipts, cash payments and net cash balance over a period of time
Months-> Cash Receipts Cash Payments Surplus/deficit Cash credit
Peak deficit is financed and drawings regulated by monthly budgets
1 2 3 4 5 6 7 8 9 10 11 12
Advantages: Suitable for seasonal industries, contractors, software exporters etc. Limitations: Will not reflect changes in various current assets and liabilities. Will it give a clue whether a company is earning profit or not. Funds flow statement is required to detect any diversion of funds.
Other SSI units have Tandon Committee 1st Method will be implemented. Single Financial Agency for WC & Term loan for SSI. Application should be processed in 15 days (up to 25000) and 8 weeks (for more than 25000)
Working Capital Operating Cycle Tandon Committee: MPBF Chore Committee: Cash Budget method for seasonal industries Nayak Committee on SSI Lending: Turnover Method Kannan Committee: Flexibility of Methods