Financing of Working

Capital
Submitted by:
Devendra Lata
Neha Kashyap
Neha Sharma
Palak Mathur
Neeru Yadav
Rekha Choudhary
Mamraj Sharma
Submitted to: Shweta Singh
 What is Working Capital

Working Capital means that part of the

total assets of the business that changes
from one form to another form in the
ordinary course of business operations.
Working capital is the amount of capital
which is required for the day to day
working of a business.
Financing of Working Capital
Working Capital finance means raising of
funds for a short term i.e. less than one
year.
Financing of Working Capital means to
provide the funds to business or firms for
day to day requirements.
 Financing of Working Capital

Long-term sources Shot-term sources

-Share Capital
Short-term sources
Spontaneous
-Debentures
-Bank credit
-Term Loan -Commercial
-Trade Credit
-Deferred paper.
-Retained -Public Deposit
Income
earnings -Intercorporate
-Accrued
Expenses deposits.
 Long term source of W.C.

Lower Risk

Greater Stability

Greater liquidity
 Short-term source of W.C.
Cost implications

Flexibility

Close Relations with banks.

 Trade Credit
Trade credit is the principle source of w.c.
financing.It is the Credit extended by one
business firm to another as incident to
sale or purchase of goods and services.
Trade credit is credit extended by sellers
to buyers al all levels of production and
distribution process down to the retailer.
Determinants of Trade Credit
Stock turnover of the Product.
Financial position of the seller.
Financial position of the buyer.
Cash Discount.
Degree of Risk.
Extent of Competition.
 Advantage of Trade Credit
East Availability

Flexibility.

Informality.
Disadvantages of Trade Credit
Prices charged for credit sales are usually
higher and cash discount is not availed of.
Supplier has to bear loss of bad debts in
addition to the cost of administrating credit
accounts.
In case of non-payment, goodwill is
adversely affected.
Supplier has to invest larger w.c. to sell
goods on credit.
 Accrued Expenses

Accrued expenses represent a liability that

the firm has to pay for the services which it
has already received. i.e. Wages and
Salary, taxes and interest.
 Deferred Income
Differed income represents funds received
by the firm for goods and services which it
has agreed to supply in future.
Advance payments made by customers
constitute the main item of deferred
income.
These payments are not recorded as
revenue until goods and services have
been delivered to the customers.
 Bank Credit
Credit facility provided by commercial
banks is the most important source to
meet the short-term and w.c. requirement.
This short-term finance to business firm is
regarded as self liquidity in the sense that
the uses to which the borrowing firm is
expected to put funds are generally
expected to generate cash flow adequate
to repay the loan within a year.
 Sources of Bank credit
Loans
Cash Credit.
Overdraft.
Purchasing and Discounting of Bills.
Letter of Credit.
 Tondon Committee
Recommendations
The R.B.I. appointed a study group (known as Tondon
committee) under the chairmanship of P.L.Tondon to
frame the guidelines for the effective regulation of bank
credit and other related aspects. The recommendations
were mainly based on the following three principles:
- A Proper financial discipline has to observed by the
borrower.
- The main function of a banker as a leader is to
supplement the borrower’s resources to carry on
acceptable level of current assets.
- The bank should know the end-use of bank credit.
 Chore Committee
The R.B.I. constituted another working group
under the chairmanship of K.B.Chore to promote
greater credit discipline. The recommendations
as below:
- System of Credit
- Bifurcation of Credit limit.
- Submission of Quarterly Statement.
- Reduction in over dependence of Bank credit.
 Commercial Paper

Commercial paper is an unsecured

promisory note payble to the bearer and
issued by business firms for a definite
period (Normal 7 days to 90 days) based
on discount, to raise short-term funds.
 Public Deposits
Public deposits means any money
received by a non-banking company by
way of deposits from the public including
the employees, customers and
shareholders of the company other than in
the form of shares and debentures.
Advantages of Public Deposit
Convenience in Raising Funds.
Low Cost of Funds.
Flexible Capital Structure.
Undiluted Control
Public Interest.
Trading on Equity.
No Mortgage of Assets.
Disadvantage of Public Deposit

Fair Weather Friends.

Encourages Speculation.
Hurdle in the Growth of Capital Market.
Legal Restrictions.
Other Demerits.
 Inter-Corporate Deposits

Call Deposits

Three-month Deposits

Six month Deposits.

 Factoring
Relationship between the seller of goods
and a financial firm, called the factor,
whereby the latter purchases the
receivables of the former and also
administer the receivables of the forms or
the out of right sale of accounts receivable
is known as factoring.
 Retained Earnings
Ploughing back of profits is a technique of
financial management under which all
profits of a company are not distributed
amongst the shareholders as dividend, but
a part of the profits is retained or re-
invested in the business.
Advantage of Retained Earning to
the company:
Safety from Trade cycles.
Stable Dividend Policy.
Economical method of Financing.
Easy Retirement of Debts
Making Good the Deficiencies of
Depreciation.
 Advantage to Shareholders:

Increase in the Value of Shares.

Safety of Investment.
Advantage to society.
Higher Standard of Living.
Increased Income.
Limitations of Retained Earnings:

Over Capitalization.
Creation of Monopolies.
Misuse of Savings
Manipulation in the Value of Shares.