Working Capital
Gross Working Capital
- Gross Working Capital is the capital invested in total current assets of the enterprise
Net Working Capital
- Current Assets – Current Liabilities
Working Capital Gap
- Current Assets – Current Liabilities other than bank borrowings
Source of Working Capital
- Credit available on purchase
- Short term bank borrowing
- Surplus of long term funds over long term uses
- Short term borrowing
Assessment of Working Capital Requirements
- Turnover Method
- Fund-based working capital credit limits up to Rs.5 crore
- Working Capital requirements of the borrower will be 25% of the projected annual turnover
- 20% of the projected annual turnover should be provided by the bank
- 5% of the projected annual turnover should be provided by the borrower (20% Margin)
Ex-
Projected turnover of ABC company is Rs.200 Lakhs
- Working Capital Requirement(25%) = Rs.50 Lakhs
- Bank Finance for Working Capital(20%) = Rs.40 Lakhs
- Borrower Margin Requirement(5%) = Rs.10 Lakhs
- Maximum Permissible Bank Finance Method (MPBF)
First Method of Lending | Second Method of Lending | Third Method of Lending | |||
Total Current Assets (TCA) | 200 | Total Current Assets (TCA) | 200 | Total Current Assets (TCA) | 200 |
Less- Total Current Liabilities | 100 | Less- Total Current Liabilities | 100 | Less- Core Current Assets | 50 |
Working Capital Gap (WCG) | 100 | Working Capital Gap (WCG) | 100 | Total Real Current Assets | 150 |
Less- 25% of WCG | 25 | Less- 25% of TCA | 50 | Less- Total Current Liabilities | 100 |
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| Working Capital Gap (WCG) | 50 |
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| Less 25% of Real CA | 37.5 |
MPBF | 75 | MPBF | 50 | MPBF | 12.5 |
- Cash Budget Method
- Fund-based working capital limit excess of Rs.5 crore
- Suited to units dealing in seasonal products, construction activities and order based activities
- More customer friendly – Peak level cash deficit working capital limit provided
The Cash Budget statement would comprise of projected receipts and payments for the next 12 months on account of :-
- Business Operations
- Non-Business Operations
- Cash flow from capital accounts
- Sundry items
Impact of Inadequate Working Capital
- Not utilize fully production capacity – required working capital
- Not able to take cash discount facilities
- Not able to take advantages of profitable business opportunities
- Borrow funds at exorbitant rates of interest
- Low liquidity – impact on solvency of business
- Operating inefficiencies – difficult to meet day to day commitments
- Fixed assets are not efficiently utilized – Return on investment slumps
- Firm loses its reputation