Working Capital

Working Capital Loans

Overview of Indian banking sector

Banking in India has a long and elaborate history of more than 200

years. The beginning of this industry can be traced back to 1786, when the

country’s first bank, Bank of Bengal, was established. But the industry

changed rapidly and drastically, after the nationalization of banks in 1969.

As a result, the public sector banks began experiencing numerous positive

changes and enormous growth. Then came the much-talked-about

liberalization and economic reforms, which allowed banks to explore new

business opportunities and not just remain constrained to generating

revenues from mere borrowing and lending. This provided the Indian

banking scenario a remarkable facelift that only continues to get better with

time. However, even today, despite the foray of foreign banks in the country,

nationalized banks continue to be biggest lenders in the country

The growth in the Indian Banking Industry has been more qualitative

than quantitative and it is expected to remain the same in the coming years.

Based on the projections made in the "India Vision 2020" prepared by the

Planning Commission and the Draft 10th Plan, the report forecasts that the

pace of expansion in the balance-sheets of banks is likely to decelerate. The

total assets of all scheduled commercial banks by end-March 2010 are

estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of

GDP at current market prices as compared to 67 per cent in 2002-03. Bank

assets are expected to grow at an annual composite rate of 13.4 per cent

during the rest of the decade as against the growth rate of 16.7 per cent that

existed between 1994-95 and 2002-03. It is expected that there will be large

additions to the capital base and reserves on the liability side.

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Brief introduction of working capital

Every business needs funds for two purposes- for its establishment

and to carry out its day to day operations. Long term funds are required to

create production facilities through purchase of fixed assets such as plant

and machinery, land, building, furniture etc. Investments in these assets

represent that part of firm’s capital which is blocked on a permanent or fixed

basis and is called fixed capital.

Working capital is the life blood and nerve centre of a business. Just

as circulation of blood is essential in the human body for maintaining life,

working capital is very essential to maintain the smooth running of a

business. No business can run successfully with out an adequate amount of

working capital. .

Working capital refers to that part of firm’s capital which is required

for financing short term or current assets such as cash, marketable securities,

debtors, and inventories. In other words working capital is the amount of

funds necessary to cover the cost of operating the enterprise.

Thus, Working capital means the funds (i.e.; capital) available and

used for day to day operations (i.e.; working) of an enterprise. It consists

broadly of that portion of assets of a business which are used in or related to

its current operations. It refers to funds which are used during an accounting

period to generate a current income of a type which is consistent with major

purpose of a firm existence.

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Working capital and the banking sector

The growth of the banking sector can be related to the rapid

industrialization in the country. All industries require funds also termed as

working capital to carry out their day to day operations. Banks play a vital

role in providing working capital to the businesses thus promoting

development of the industrial and corporate sector.

Today there are a number of banks operating in India that provide

working capital loans to the organisations. These banks provide working

capital loans to the organisations on terms and conditions favourable for the

bank itself and the organisation, thus assisting in the development of the

economy at large.

The various banks that provide working capital loans are:

# HDFC Bank

# HSBC Bank

# Indusind Bank

# Standard Chartered Bank

# State Bank of India

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Working capital

Working capital occupies a peculiar position in the capital structure of

a company. The decision as to the adequacy of working capital is a

complicated and yet a very important decision.

Working capital is the life-blood of all types of enterprises,

manufacturing and trading both. It is constantly required to buy raw

materials for payment of wages and other day-to-day expenses. Without

adequate working capital, manufacturing operations will be crippled. For

trading enterprises, the capacity to stock a variety of goods for sale

depends upon its working capital. It is a base on which all the activities

of business enterprise depend.

If the business has enough working capital, it can maintain its operating

efficiency. It can buy materials and other goods on reasonable terms, can

take benefits of quantity discount and cash discount. It can keep the

interest burden to the minimum.

Adequate working capital provides psychological satisfaction and relief

to the management.

Only those enterprises which have adequate working capital can survive

in times of depression. The investment in raw materials becomes long-

term investments during depression and cash flow declines due to fall in

sale. In such circumstances only enterprises with adequate working

capital can survive.

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It has been observed that number of business units have failed due to lack

of working capital.

The inadequate working capital has the following adverse

consequences:

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

profit target.

Operating inefficiencies creep in when it becomes difficult even to meet

day-to-day commitments.

Fixed assets are not efficiently utilized for the lack of working capital

funds. Thus the firm’s profitability would deteriorate.

Shortage of working capital funds renders the firm unable to avail

attractive credit opportunities etc.

The firm loses its reputation when it is not in a position to honor its short

term obligations. As a result, the firm faces tight credit terms.

The excessive working capital is equally unprofitable. The extra

working capital is not utilized in business operations and earns no profit for

the firm. It results in unnecessary accumulation of inventories, leading to

inventory mishandling, waste, theft etc.

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The abundance of working capital would lead to waste and

inefficiency

Definitions:

Working capital like many other accounting terms and financial terms

has been used by different people in different senses.

One school of thought believes that, as all capital resources available

to a business organisation – From shareholders, bondholders, and creditors

(secured and unsecured) – works up in the business activities to generate

revenues and facilitate future expansion and growth; they are to be

considered as ‘working capital’.

Another school of thought links working capital with current assets

and current liabilities. According to them, the excess of current assets over

current liabilities is to be rightly considered as the working capital of a

business organisation.

The definition of working capital given by Shubin is more illustrative.

He defines working capital as “the amount of funds necessary to cover the

cost of operating the enterprise. Working capital in a going concern is a

revolving (circulating fund), it consists of cash receipts from sales which are

used to cover the cost of current operations.

“Circulating capital means current assets of the company that are

changed in the ordinary course of business from one form to another, as for

example from cash to inventories, inventories to receivables and receivables

to cash.”

“Working capital is descriptive of that capital which is not fixed. But,

the more common use of working capital is to consider it as the difference

between the current assets and the current liabilities”.

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Current assets and current liabilities are assets and liabilities which

arise in the course of business.

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Characteristics of Working Capital

The features of working capital distinguishing it from the fixed capital

are as follows:

(1) Short term Needs:

Working capital is used to acquire current assets which get converted

into cash in a short period. In this respect it differs from fixed capital which

represents funds locked in long term assets. The duration of the working

capital depends on the length of production process, the time that elapses in

the sale and the waiting period of the cash receipt.

(2) Circular Movement:

Working capital is constantly converted into cash which again turns

into working capital. This process of conversion goes on continuously. The

cash is used to purchase current assets and when the goods are produced and

sold out; those current assets are transformed into cash. Thus it moves in a

circular away. That is why working capital is also described as circulating

capital.

(3) An Element of Permanency:

Though working capital is a short term capital, it is required always

and forever. As stated before, working capital is necessary to continue the

productive activity of the enterprise. Hence so long as production continues,

the enterprise will constantly remain in need of working capital. The

working capital that is required permanently is called permanent or regular

working capital.

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(4) An Element of Fluctuation:

Though the requirement of working capital is felt permanently, its

requirement fluctuates more widely than that of fixed capital. The

requirement of working capital varies directly with the level of production. It

varies with the variation of the purchase and sale policy; price level and the

level of demand also. The portion of working capital that changes with

production, sale, price etc. is called variable working capital.

(5) Liquidity:

Working capital is more liquid than fixed capital. If need arises,

working capital can be converted into cash within a short period and without

much loss. A company in need of cash can get it through the conversion of

its working capital by insisting on quick recovery of its bills receivable and

by expediting sales of its product. It is due to this trait of working capital

that the companies with a larger amount of working capital feel more

secure.’

(6) Less Risky:

Funds invested in fixed assets get locked up for a long period of time

and can not be recovered easily. There is also a danger of fixed assets like

machinery getting obsolete due to technological innovations. Hence

investment in fixed capital is comparatively more risky. As against this,

investment in current assets is less risky as it is a short term investment.

Working capital involves more of physical risk only, and that too is limited.

Working capital involves financial or economic risk to a much less extent

because the variations of product prices are less severe generally. Moreover,

working capital gets converted into cash again and again; therefore, it is free

from the risk arising out of technological changes.

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(7) Special Accounting System not needed:

Since fixed capital is invested in long term assets, it becomes

necessary to adopt various systems of estimating depreciation. On the other

hand working capital is invested in short term assets which last for one year

only. Hence it is not necessary to adopt special accounting system for them.

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Need for working capital

The prime objective of the company is to obtain maximum profit

thought the business. The amount of profit largely depends upon the

magnitude of sales. However the sale does not convert into cash

instantaneously. There is always a time gap between sale of goods and

receipt of cash. The time gap between the sales and their actual realization in

cash is technically termed as operating cycle. Additional capital required to

have uninterrupted business operations, and the amount will be locked up in

the current assets. Regular availability of adequate working capital is

inevitable for sustained biasness operations. If the proper fund is not

provided for the purpose, the business operations will be effected.

Every business needs some amount of working capital. It is needed for

following purposes-

For the purchase of raw materials, components and spares.

To pay wages and salaries.

To incur day to day expenses and overhead costs such as fuel,

power, and office expenses etc.

To provide credit facilities to customers, etc.

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Determinants of working capital

The amount of working capital depends upon the following factors:

1. Nature of business

The nature and volume of business is an important factor in deciding

the working capital. Some businesses are such, due to their very nature, that

their requirement of fixed capital is more rather than working capital. These

businesses sell services and not the commodities and that too on cash basis.

As such, no funds are blocked in piling inventories and also no funds are

blocked in receivables. E.g. public utility services like railways,

infrastructure oriented project etc. there requirement of working capital is

less. On the other hand, there are some businesses like trading activity,

where requirement of fixed capital is less but more money is blocked in

inventories and debtors. The requirement of working capital varies from

industry to industry from time to time I the same industry.

2. Length of production & cycle Production policies

In some business like machine tools industry, the time gap between

the acquisition of raw material till the end of final production of finished

products itself is quit high. As such amount may be blocked either in raw

material or work in progress or finished goods or even in debtors. Naturally

there need of working capital is high.

Production policies of the organizations effects working capital

requirements very highly. Seasonal industries, which produces only in

specific season requires more working capital. Some industries which

produces round the year but sale mainly done in some special seasons are

also need to keep more working capital.

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3. Size and growth of business

It is an important factor in determining the proportion of working

capital. The general principle in this connection is that the bigger the size of

the unit, the more will be the amount of working capital required. In very

small company the working capital requirement is quit high due to high

overhead, higher buying and selling cost etc. as such medium size business

positively has edge over the small companies. But if the business start

growing after certain limit, the working capital requirements may be

adversely affected by the increasing size.

The working capital requirements increase with growth and expansion

of business. Hence planning of the working capital requirements and its

procurement must go hand in hand with the planning of the growth and

expansion of the firm. The implementation of the production plan that aims

at the growth or expansion of the unit necessitates more of fixed capital and

working capital both.

Even the expansion of the volume of sales increases the requirements

of working capital. Of course, it is difficult to establish a quantitative

relationship between them. An important point to be noted is that the

requirements of working capital emerge before the growth or expansion

actually takes place.

4. Business/ Trade cycle

Cyclical changes in the economy also influence the level of working

capital. During boom period, the tendency of management is to pile up

inventories of raw materials and finished goods to avail the advantage of

rising prove. This creates demand for more capital. Similarly during

depression when the prices and demand for manufactured goods constantly

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reduce the industrial and trading activities show a downward trend. Hence

the demand for working capital is low.

If the company is operating in the time of boom, the working capital

requirement may be more as the company may like to buy more raw

material, may increase the production and sales to take the benefit of

favourable market, due to increase in the sales, there may more and more

amount of funds blocked in stock and debtors etc. similarly in the case of

depressions also, working capital may be high as the sales terms of value

and quantity may be reducing, there may be unnecessary piling up of stack

without getting sold, the receivable may not be recovered in time etc.

Business fluctuations are of two types: seasonal fluctuations which

arise out of seasonal changes in demand for the product and cyclical

fluctuations which occur due to ups and downs of economic activities in the

country as a whole.

The cyclical fluctuations are made up of periods of prosperity and

depression. The sales and prices increase during prosperity necessitating

more working capital in the form of inventories and book-debts. If new

investment is made in fixed capital to meet additional demand for the

product, then also there will be an increase in working capital requirement.

Generally, business units adopt the policy to borrow funds on a large scale to

increase investment in working capital. As against this, the requirement of

working capital gets reduced during depression and therefore they adopt the

policy of reducing their short term debts.

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5. Terms of purchase and sales (Credit policy)

In the present-day circumstances, almost all units have to sell goods

on credit. Some time due to competition or custom, it may be necessary for

the company to extend more and more credit to customers; as result which

more and more amount is locked up in debtors or bills receivables which

increase the working capital requirement. The nature of credit policy is an

important consideration in deciding the amount of working capital

requirement. The larger the volume of credit sales, the greater will be the

requirement of working capital. Also, the longer the period the collection of

payment takes, the greater will be the requirement of working capital.

On the other hand, in the case of purchase, if the credit is offered by

suppliers of goods and services, a part of working capital requirement may

be financed by them, but it is necessary to purchase on cash basis, the

working capital requirement will be higher.

6. Profitability

The profitability of the business may be vary in each and every

individual case, which is in turn its depend on numerous factors, but high

profitability will positively reduce the strain on working capital requirement

of the company, because the profits to the extend that they earned in cash

may be used to meet the working capital requirement of the company.

The net profit of a firm is a good index of the resources available to it

to meet its capital requirements. But, from the viewpoint of working capital

requirement, it is the profit in the form of cash which is important, and not

the net profit. The profit available in the form of cash is called cash profit

and it can be assessed by adding or deducting non-cash items from the net

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profit of the firm. The larger the amount of cash profit, the greater will be

the possibility of acquiring working capital.

7. Operating efficiency

If the business is carried on more efficiently, it can operate in profits

which may reduce the strain on working capital; it may ensure proper

utilization of existing resources by eliminating the waste and improved

coordination etc. However, if there is improper co-ordination between

production and distribution policies/ department more working capital

maybe needed.

8. Current asset policies

A company having ample stock of liquid current assets will require

lesser amount of working capital, since adequate funds can easily be

procured by disposal of current assets. The quantum of working capital of a

company is significantly determined by its current assets policies. A

company with conservative assets policy may operate with relatively high

level of working capital than its sales volume. A company pursuing an

aggressive amount assets policy operates with a relatively lower level of

working capital.

9. Dividend Policies

A firm having liberal dividend policy requires high working capital to

pay cash dividends, whereas a firm following a conservative dividend policy

will require less amount of working capital.

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10.Expansion

An expanding business will require increased working capital

proportionate to the rate of expansion.

11.Taxation Policies

Government taxation policy affects the quantum of working capital

requirements. High tax rates demand more amount of working capital.

12.Turnover of circulating capital

Turnover of circulating capital plays an important and decisive role in

judging the adequacy of working capital. The speed with which the

circulating capital completes its round, i.e., conversion of cash into book

debts or bills receivables, and book debts or bills receivables into cash again

plays an important role.

13. Abnormal factors

Abnormal conditions like strikes and lockouts also require additional

working capital. Recessionary conditions necessitate a higher amount of

stock of finished goods remaining in stock. Similarly, inflationary conditions

necessitate more funds for working capital to maintain the same amount of

current assets.

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Importance of working capital

Organisations profitability to a large extent depends upon the quantum

of working capital available with it. Adequate working capital is a source of

energy to any business organisation. The need for working capital cannot be

emphasized. Every business needs some amount of working capital. The

need for working capital arises due to time gap between production and

realization of cash from sales. The following points will highlight the

importance of Working Capital:

Adequate Working Capital:

# Enables a company to meet its obligations:

# Ensures the solvency of a company:

# Ensures the credit standing of a company:

# Facilitates obtaining credit from banks without much difficulty:

# Enables a company to make prompt payments to its creditors and

thereby take advantage of cash and quantity discounts offered by

them

# Enables an organisation to tide over difficult periods successfully:

# Enhances the goodwill of a company as it can meet its operational

expenses and maturing liabilities in time: and

# Improves the prospects of prosperity and progress of a company.

# For the purchase of raw materials, components and spares;

# To pay wages and salaries;

# To incur day to day expenses and overhead costs such as fuel, power

and office expenses, etc;

# To meet the selling costs facilities to the customers;

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# To provide credit facilities to the customers;

# To maintain the inventories of raw material, work-in –progress, stores

and spares and finished stock

Thus, adequate working capital is an important factor behind the

prosperity of a business organisation. It is thus rightly called “the backbone

of the financial structure of a business organisation”.

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Types of working capitalWorking capital has been classified and distinguished in a

number of ways. Some of the important classifications are as follows:

Quantitative basis

1. Gross working capital

Gross working capital is equal to the current assets only. Items

of current assets are like stock of raw material, work in progress, finished

goods, spares and consumable stores, sundry debtor bills receivables, cash

and bank balance, prepaid expenses, accrues income, advance payments,

short term investments, etc. It is the value of non-fixed assets of an

enterprise and includes the above

Gross working capital indicates the quantum of working capital

available to meet the current liabilities.

Gross working Capital = Current Assets

2. Net working Capital

Net working capital is the excess of current assets over the current

liabilities, i.e. current assets less current liabilities. This concept of working

capital is widely accepted. This approach, however, does not reflect the

exact position of working capital due to the following factors:

i. valuation of inventories including written- offs

ii. debtors include the profit element

iii. debts outstanding for more than a ear like wise debtors which

are doubtful or had not provided for are included as assets are

also placed under the head current assets

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iv. non-moving and slow-moving items of the inventories are also

included in inventories

v. write-offs and the profits do not involve cash outflow

Net Working Capital = Current Assets - Current Liabilities

Difference between Gross and Net Working Capital

Gross and Net Working Capital are quantitative concepts, but they differ

from each other in various aspects. The following are the major differences

between the two,

# Gross Working Capital means the total current assets and Net

Working Capital means excess of current assets over current

liabilities.

# Though gross Working Capital can be measured by resorting to

borrowings, net working capital cannot be easily measures except by

profitable business operations over a considerable number of

accounting periods.

# Gross Working Capital is quantitative concept bit Net Working

Capital is a qualitative concept.

# Gross Working Capital indicates the strength position of a business

organisation whereas net working capital is considered to be the index

of solvency and liquidity of the business.

# Gross Working Capital data cannot be used in isolation to indicate the

changes in working capital and to analyze the flow of funds. Net

Working Capital data is immensely useful in measuring the changes in

the financial position of the company.

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3. Time Basis

This classification is based on the time factor and it is more useful

than the classification made on quantitative basis.

a. Permanent Working Capital

b. Temporary or variable Working Capital

a. Permanent Working Capital:

This represents the quantum of current assets required on a continuing

basis for an entire year. It is the minimum aggregate of cash, inventory and

debtors maintained to carry on business operations smoothly at any time

during an accounting period. Permanent working capital is locked in the

business as long as it continues to exist. Permanent working capital is of

two types:

Initial Working Capital

Regular Working Capital

Initial working capital:

This is the amount of current assets required at the inception of an

organisation. In the initial stages, when the revenues are not regular, it may

be difficult for the company to obtain credit from the banks and at the same

time it may be required to grant credit to the customers. In such a case

adequate working capital is required to activate the circulation of capital and

keep it moving till the collection from the debtors and other cash receipts

exceed the payment.

Regular working capital:

This the amount of working capital required for the continuous

operations of the enterprise. It refers to the excess of current assets over

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current liabilities. Any organisation has to maintain a minimum stock of raw

material, finished goods and cash to ensure its smooth working and to meet

its immediate obligations.

Thus permanent working capital is the quantum of funds required

permanently for the production of goods and services on a continuing basis

to satisfy the demands of the customers

Permanent working capital has some features. They are:

# Permanent working capital is different from fixed assets which are

sunk in the business operations and retain their form for a long period.

# Permanent working capital is constantly changing. They change from

one current asset to another as in the case of raw materials Raw

materials after they are processed, become finished goods finished

goods when they are sold become debtors or receivables debtors when

they are realized become cash and so on.

# The value presented by permanent working capital never leaves the

business operation. That is why the financial manager’s resort to long

term borrowings like debentures to meet their company’s permanent

working capital requirements.

# The size of permanent working capital will increase as long as the

business is growing and expanding.

b. Temporary or variable Working Capital

Seasonal Working Capital

Special Working Capital

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Temporary Working Capital:

Temporary Working Capital is also called as variable Working

Capital or circulating Working Capital. It is influenced by the seasonal

fluctuations of the business concerned. Variable working capital may be:

i. Seasonal Working Capital or

ii. Special Working Capital

Seasonal Working Capital:

This is the amount of working capital required at stated intervals to

meet the changing seasonal requirements. When the season approaches,

business needs more funds to meet the seasonal pressure of demand. For

example, a textile dealer would require large amount of working capital a

few months before Diwali.

Special Working Capital:

Special Working Capital is the amount of e Working Capital required

to meet the unforeseen eventualities that may arise during the course of

operations. Any organisation must have additional funds to meet the

contingencies. For example, sudden increase in demand, strikes, fire, floods,

drastic rise in taxes, etc.

4. Measurement Basis

Positive Working Capital

Negative Working Capital

Zero Working Capital

Positive Working Capital:

When the current assets are more than the current liabilities such a

situation is known as positive Working Capital. Example, If the current

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assets are Rs.500000/- and the current liabilities Rs.200000/- then the

Working Capital which is Rs.300000/- is termed a positive Working Capital.

Negative Working Capital:

When the current assets are less than the current liabilities such a

situation is known as Negative Working Capital. Example, If the current

assets are Rs.500000/- and the current liabilities Rs.600000/- then the

Working Capital which is negative of Rs.100000/- is termed as Negative

Working Capital. A negative working capital indicates the lack of liquidity

and solvency position which is danger signal forte business.

Zero Working Capital:

When the investment in current assets is exactly equal to the current

liabilities such a situation is known as Zero Working Capital. Example, If

the current assets are Rs.500000/- and the current liabilities Rs.500000/-

then the situation is of zero working capital.

5. Cash Working Capital:

Cash working capital refers to the working capital which is available

in cash or cash resources. It is reflected by the items contained in the income

statement in between the two balances sheet dates. It reveals the operational

inflow as well as outflows of cash. It is essentially in liquid form and is

calculated from the items appearing in the profit and loss account. It shows

the real flow of money at a particular time. It is considered to be the most

realistic approach in Working capital Management. It indicates the adequacy

of the cash flow.

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Sources of working capitalThe company can choose to finance its current assets by

Long term sources

Short term sources

Combination of them

Sources of working capital

Long term sources

Long term sources of permanent working capital include equity and

preference shares, retained earning, debentures and other long term debts

from public deposits and financial institution. The long term working capital

needs should meet through long term means of financing. Financing through

long term means provides stability, reduces risk or payment, and increases

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Sources of Working Capital

Short-term Sources

Issue of shares

Retained Earnings

Reserves

Issue of debentures

Long-term Sources

Internal

External

Depreciation fund

Accrued Expenses

Trade credit

Credit papersAdvance from customersCommercial banks

Public Deposits

Financial Loans


liquidity of the business concern. Various types of long term sources of

working capital are summarized as follow

# Issue of shares

It is the primary and most important sources of regular or permanent

working capital. Issuing equity shares as it does not create and burden on the

income of the concern. Nor the concern is obliged to refund capital should

preferably raise permanent working capital. Thus it is preferable to arrange

the permanent working capital through issue of shares

# Retained earnings

A firm can meet its working capital requirement by reinvesting the

profits earned by it. Retain earning accumulated profits are a permanent

sources of regular working capital. It is regular and cheapest.

# Reserves:

Like retained earnings, the use of reserves for financing the working

capital requirement is also a costless sources of finance. Various funds of the

company like depreciation fund, provision for tax and other provisions kept

with the company can be used as temporary working capital.

# Issue of debentures

It crates a fixed charge on future earnings of the company. The

company is obliged to pay interest. Management should make wise choice in

procuring funds by issue of debentures.

# Long term debt

Company can raise fund from accepting public deposits, debts from

financial institution like banks, corporations etc. the cost is higher than the

other financial tools.

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Other sources sale of idle fixed assets, securities received from

employees and customers are examples of other sources of finance.

Short term sources of temporary working capital

Temporary working capital is required to meet the day to day business

expenditures. The variable working capital would finance from short term

sources of funds. And only the period needed. It has the benefits of, low cost

and establishes closer relationships with banker.

Some sources of temporary working capital are given below;

# Commercial bank

A commercial bank constitutes significant sources for short term or

temporary working capital. Normally companies obtain short-term working

capital from banks in the form of short-term loans, cash credit, and overdraft

and through discounting the bill of exchange.

# Public deposits

Most of the companies in recent years depend on this source to meet

their short term working capital requirements ranging fro six month to three

years.

Business firms sometimes succeed in mobilizing enough funds by

way of short-term deposits from publics. By and large attraction of higher

rate of interest prompts the public to put their savings as short-term deposits

with business firms.

# Trade credit:

Usually the manufacturing concerns, wholesalers and retailers avail

this type f credit. Such credit is extended by suppliers of goods or raw-

materials. This facility is given for a short period which may extend for a

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few weeks or a few months, based on prevailing market usage. No interest is

charged by the suppliers if payment is made by the customer before the

expiry of the credit period.

# Various credits

Trade credit, business credit papers and customer credit are other

sources of short term working capital. Credit from suppliers, advances from

customers, bills of exchanges, promissory notes, etc helps to raise temporary

working capital.

# Advance from customers:

Advance form customers are also considered as a principle source of

short-term working capital finance.

Both long term and short term funds

The company should meet its working capital needs through both long

term and short term funds. It will be appropriate to meet at least 2/3 of the

permanent working capital equipments form long term sources, whereas the

variables working capital should be financed from short term sources. The

working capital financing mix should be designed in such a way that the

overall cost of working capital is the lowest, and the funds are available on

time and for the period they are really required.

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Component of Working Capital

There are two of the major following components of the Working

Capital:

Current Assets:

Current assets are those assets which can be converted into cash in the

normal course of business within a short period- say a maximum of one

year. They are also called floating or circulating assets because they cannot

be put to constant use. They are meant for resale or produced for the purpose

of sale i.e., converting them into cash. In brief, the list of current assets

comprises of:

# Cash in hand and bank balances;

# Bills receivables;

# Sundry debtors (less provision for bad debts);

# Short-term loans and advances;

# Inventories of stocks as:

Raw- material,

Work-in-progress,

Stores and spares,

Finished goods.

# Temporary Investments of surplus funds;

# Investments held for short term and easily marketable securities:

# Prepaid Expense;

# Accrued Incomes.

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Current Liabilities:

Current liabilities are those liabilities which are intended to be paid in

the ordinary course of business within a short period of normally one

accounting year out of the current assets or the income of the business. Such

as:

# Bills Payable;

# Sundry creditors or accounts payable;

# Accrued or outstanding Expenses;

# Short-term loan, advances and deposits;

# Dividends Payable;

# Bank overdrafts;

# Provision for taxation.

Page | 31


Working Capital Cycle

The working capital cycle is alternatively also known as the operating

cycle concept of working capital. This concept is used on the continuity of

flow of funds through business operation. This flow of value is caused by

different operational activities during a given period of time. The operational

activities of an organisation may comprise:

a. Purchase of raw materials,

b. Conversion of raw materials into finished products,

c. Sale of finished products and

d. Realization of accounts receivable

Working Capital Cycle

Material cost is partly covered by trade credit from suppliers and

successive operational activities also involve cash flow. If the flow continues

without any interruption, operational activities of the company will also

continue smoothly. Movements of cash through the above process are called

Page | 32

Cash

Raw Materials

Work in progress

Finished goods

Sales

Debtors


the circular flow of cash. The period required to complete this flow is called

he operating period’ or the operating cycle.

To estimate the working capital requirement, the number of operating

cycles in a year is to be calculated. This is calculated by dividing the number

of days in a year by the length of the cycle. Total operating expenses of a

year divided by the number of operating cycles in that year is the working

capital required.

Page | 33


Technique for assessment of Working Capital requirement

1. Estimation of Component of working capital Method:

Since working capital is the excess of current assets over current

liabilities, an assessment of the working capital requirements can be made

by estimating the amounts of different constituents of working capital e.g.,

inventories, accounts receivable, cash, accounts payable, etc.

2. Percent of sales Approach:

This is a traditional and simple method of estimating working capital

requirements. According to this method, on the basis of past experience

between sales and working capital requirements, a ratio can be determined

for estimating the working capital requirements in future.

3. Operating Cycle Approach:

According to this approach, the requirements of working capital

depend upon the operating cycle of the business. This is a more dynamic

method., it refers to working capital in a realistic way. Working capital is

decided on the basis of length of operating cycle. It is calculated by dividing

operating expenditure by the number of operating cycles.The operating cycle

begins with the acquisition of raw materials and ends with the collection of

receivables it may be broadly classified into the following four stages viz.

# Raw materials and stores storage stage.

# Work-in-progress stage.

# Finished goods inventory stage.

# Receivables collection stage.

The duration of the operating cycle for the purpose of estimating

working capital requirements is equivalent to the sum of the durations of

Page | 34


each of these stages less the credit period allowed by the suppliers of the

firm.

Symbolically the duration of the working capital cycle can be put as follows:

O = R + W + F + D - C

Where,

O = Duration of operating cycle;

R = Raw materials and stores storage period;

W = Work-in-progress period;

F = Finished stock storage period;

D = Debtors collection period;

C = Creditors payment period.

Each of the components of the operating cycle can be calculated

as follows:-

R = Average stock of raw materials and stores . Average raw materials and stores consumptions per day

W = Average work-in-progress inventoryAverage cost of production per day

D = Average book debts . Average credit sales per day

C = Average trade creditors . Average credit purchases per day

After computing the period of one operating cycle, the total number of

operating Cycles that can be computed during a year can be computed by

Page | 35


dividing 365 days with number of operating days in a cycle. The total

expenditure in the year when year when divided by the number of operating

cycles in a year will give the average amount of the working capital

requirement.

Page | 36


Proforma Statement showing working capital requirement

The amount of working capital may be estimated in the under-mentioned format:

Statement showing the requirements of working capital for the period______

Rs. Rs.

1. Average amount locked up in Stock of Raw Materials2. Average amount locked up in work-in progress:

Raw materials……………………………..Labour………………………………………...Overheads…………………………………….

3. Average amount locked up in Stock of Finished GoodsRaw materials……………………………….Labour………………………………………Overheads…………………………………..

4. Average amount locked up in DebtorsRaw materials……………………………….Labour………………………………………..Overheads……………………………………*Profits……………………………………..

5. Advance payment to suppliers and for expenses………6. Cash balance required…………………………………

Gross Working Capital……………………

7. Less: Creditors for supply of Raw Materials……………8. Time lag in payment of salaries, wages& expenses…….9. Advances received from customers……………………10. Add: Provision for contingencies………………………..

Net working Capital required

xxx

xxx

xxxx

(x)xx

x

xx

xx

xx

xx

xx

xx

xxx

Page | 37


Alternative FormStatement showing the requirements of working capital for the

period___________Rs. Rs.

1. Materialsa) In stockb) In Processc) In finished Goodsd) Credit to Debtors

Less: Credit from Creditors

2. Wagesa) In Process…………b) In finished Goodsc) Credit to Debtors…………………..

3. Overheadsa) In Processb) In finished Goodsc) Credit to Debtor

4. ProfitCredit to debtors

5. Bank Balance as per balance sheet

Total Working Capital

xxxxxx(x)xx

xxx

xxx

xxx

xxx

xx

xxxxxxxxx

Or

Statement of working capital requirement for the year ending__________Weeks Rs. Rs.

Current Assets (A)

Less: Current Liabilities (B)Working Capital (A-B)

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Calculation of figures required for working capital projection

# Raw materials in store

This amount is the cost of raw materials for the period for which they

will remain in stores.

= Cost of raw materials per year x No. of months/ days/ weeks raw12 or 365 or 52 materials will remain in store

# Amount locked up in work-in-progress

This is the cost of raw materials, labour and overheads for the

processing period.

= Cost of raw materials + labour + Overheads x Processing period12 or 365 or 52

Note: If material is fed in the beginning of the process, 100% of the raw

material cost for the period should be considered, and if other expenses

(wages and overheads) are evenly spread throughout the year, average i.e.

half of these expenses should be considered.

# Amount locked up in stock of finished goods

This is the cost of raw materials, labour and overheads for the period

for which finished stock will remain in warehouse.

= Cost of Raw materials + Labour + Overheads x period for which finished goods

12 or 365 or 52 will remain in warehouse

# Amount locked up in Debtors:

This is the cost of raw materials. Labour and overheads for the credit

period allowed to debtors.

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Cost of raw materials += raw materials + labour + overheads x credit period 12 or 365 or 52 allowed to debtors

# Advance paymentsThis is the amount of expenses paid for the period which has not

expired

# Minimum cash or bank balances required

This is usually given in the problem and is usually taken accordingly.

# Time-lag for payments to creditors for goodsThis is the cost of raw materials for the period of credit allowed by

suppliers and this amount has to be deducted from gross working capital obtained.

= Cost of raw material per year x Credit period allowed by suppliers12 or 365 or 52

# Time lag in payment of expensesThis is the amount of expenses paid later for a particular period.

= Cost of raw material per year x Time lag in payment to 12 or 365 or 52 creditors for expenses

# Advances received from: Advances received from customers should be done as directed in the

problem.

# Provisions for contingencies Provisions for contingencies should be made as directed in the

problem.

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Approach

The question is; what the proper amount of working capital is. It is not

an absolute amount. It depends upon the needs and circumstances available

in the company.

(1) Conservative Approach: The conservative approach states that the

proportion of current assets to current liabilities should be kept at 2:1. If this

proportion is kept, the company would be able to maintain its financial

solvency. It will be able to meet its current obligations as and when they

mature. However, the limitation of this approach is that it suggests only

quantitative measure. It should also be seen as to what types of assets are

included in current assets. If the current assets contain stock not moving fast

or receivables which are not collectible, the amount of current assets has no

meaning. Besides, looking to the ratios of different companies in the present

business world, no company maintains this ratio. It is hardly 1.40:1.

(2) Objective Tests: Some objective tests are suggested for determining

whether the working capital is adequate. (1) Whether the company is able to

make cash purchases and can avail of cash discount. (2) Whether the

company has enough credit worthiness to get finance from banks easily as

and when needed? (3) Whether the creditors allow enough credit on

purchases? (4) Whether the company experiences any difficulty in paying

dividend? On the basis of answers to the above questions, it can be said

whether working capital is adequate.

(3) Modern Approach: The adequacy of working capital is a problem of

maintaining a particular proportion of current assets; as it is mainly current

Page | 41


assets that determine the working capital. In a business, both fixed and

current assets are needed. But to support a particular level of output, the

company can have different levels of current assets. The Level of current

assets can be measured by the ratio of current assets to fixed assets. The

proportion of the two can be measured by dividing current assets by fixed

assets. From the viewpoint of this ratio, there are three types of policy. (1)

Conservative approach (2) Aggressive approach and (3) Average capital

approach. The high ratio of current assets to fixed assets suggests

conservative approach. It suggests greater liquidity and lower risk. The low

ratio shows aggressive approach in which the firm undertakes higher risks

and smaller liquidity. Generally most of companies adopt current assets

policy which falls between these two extreme policies. The following figures

show these three policies.

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Calculation of working capital

Working capital is a metric that represents a company's liquidity at

any given time. This calculation is a part of operating capital and takes into

account several current assets and liabilities such as accounts receivable,

accounts payable, inventory and cash. It is commonly used as a short-term

calculation to measure the worth of a company and can help a business

maintain a healthy level of operations for a particular period. Here's how to

calculate working capital.

Step 1: Determine the amount of cash on hand. This information can

be acquired by reviewing current bank statements, or using data from the

most recently closed general journal accounts.

Step 2: Determine the accounts receivable total. Accounts receivable

is a current asset that is also considered to be a liquid asset. This can be

added to the cash balance determined in Step 1.

Step 3: Determine the total inventory. Inventory is another current

asset used to calculate working capital; this information can be found in the

balance sheet and income statement and can be added to the amount in Step

2.

Step 4: Determine the accounts payable amount. Accounts payable is

a current liability and will need to be subtracted from the total amount

calculated in Step 3.

Step 5: Determine the accrued liabilities amount. This information can

be found in the income statement, and will need to be subtracted from the

total amount calculated in Step 4, i.e. current assets.

Page | 43

http://www.ehow.com/how_4549941_calculating-working-capital.html


Example:

From the following information pertaining to Century Ltd. prepares a

statement showing the working capital requirement:

Budgeted Sales Rs.2, 60, 000 per annum

Analysis of sales (per unit) Rs.Raw materials 3Direct labour 4Overheads 2Total cost 9Profit 1Sale price 10

It is estimated that,1. Raw materials remain in stock for three weeks and finished goods

for two weeks.2. Factory processing takes three weeks.3. Suppliers allow five weeks credit.4. Customers are allowed eight weeks credit.

Assume that that production and overheads accrue every evenly through out the year.

Solution:Statement of Working Capital Requirements for the year ending______

Weeks Rs. Rs.Current AssetsStock:

Raw materialsWork-in-progressFinished goods

Debtors

Current LiabilitiesTrade Creditors

Working Capital required

332

8

5

1500 x 3 = 45003000 x 3 = 90004500 x 2 = 9000

26000 x 8 x 10 = 52

1500 x 5

22,500

4000062500

7500

55000

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Working Note:1. Budgeted sales = Rs.2,60,000 Sales per unit =Rs.10 Number of Units to be sold = 2,60,000 = 26,000

102. Requirements per week:

A B (per annum) (per week)

Rs. Rs.(A/52)

Raw materials 26000 x 3 78000 1500

Direct labour 26000 x 3 1,04,000 2000

Overheads 26000 x 2 52,000 1000

2,34,000 4,500

3. Work –in- progress

It is stated that production and overhead accrue evenly. This wages

and overheads to be included on average basis.

Thus, 1,500 + 2,000 + 1000 = Rs.3000. 2

4. Debtors are valued at sales.

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Working Capital Ratios:

Working capital ratios indicate the ability of a business concern in

meeting its current liabilities as well as its efficiency in managing the current

assets for generation of sales. These ratios are to evaluate the efficiency with

which the firm manages and utilizes its current assets. The following

categories of ratios are used for used for evaluation of the working capital:

1. Efficiency Ratios

2. Liquidity Ratios

3. Structural Ratios

Efficiency Ratios:

# Working Capital to sales Ratios: = Sales . Working Capital

This ratio is computed by dividing working capital by sales. This ratio

helps to measure the efficiency of the utilization of net working capital. It

signifies that for an amount of sales, a relative amount of working capital is

needed. If any increase in sales is contemplated, working capital should be

adequate and thus, this ratio helps management to maintain the adequate

level of working capital.

# Inventory Ratio: = Sales .

Inventory

This ratio indicates the effectiveness and efficiency of the inventory

management. The ratio shows how speedily the inventory is turned into

accounts receivable through sales. The lower the inventory to sales ratio, the

more efficiently is said to be managed and vice-versa.

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# Current assets Turnover Ratio: = Sales . Current Assets

The ratio indicates the efficiency in which current assets turn into

sales. A lower current asset to sales ratio implies by and large a more

efficient use of funds. Thus, a high turnover rate indicates reduced lock-up

of funds in current assets. An analysis of this ratio over a period of time

reflects working capital management of a firm.

Liquidity Ratio:

# Current Ratio = Current Assets . Current Liabilities

This ratio indicates the extent of the soundness of the current financial

position of an undertaking and the degree of safety provided to the creditors.

The higher the current ratio, the larger amount of rupee available per rupee

of current liability, the more the firm’s ability to meet current obligations

and the greater safety of funds of short-term creditors. Current assets are

those assets which can be converted into cash within a year. Current

liabilities and provisions are those liabilities that are payable within a year.

A current ratio of 2:1 indicates a high solvent position. A current ratio of

1.33:1 is considered by banks as minimum acceptable level for providing

working capital finance. The constituents of the current assets are as

important as the current assets themselves for evaluation of company’s

solvency position

# Quick Ratio = Current Assets - stock – prepaid expenses . . Current Liabilities - Bank o/d – income received in advance

Quick ratio is a more refined tool to measure the liquidity of an

organisation. It is a better test of financial strength than the current ratio,

Page | 47


because it excludes very slow-moving inventories and the items of current

assets which cannot be converted into cash easily. This ratio shows the

extent of cushion of protection provided from the quick assets to the current

creditors. A quick ratio of 1:1 is usually considered satisfactory though it is

again a rule of thumb only.

Structural Health Ratios:

# Current Assets to Total Net Assets = Net Assets . . Current Assets

This ratio explains the relationship between current assets and total

investment in assets. A business enterprise should use its current assets

effectively and economically because it is out of the management of these

assets that profits accrue. A business will end up in losses if there is any lack

in managing the assets to the advantage of business. Investment in fixed

assets being inelastic in nature, there is no elbow room to make amends in

this sphere and its impact on profitability remains minimal.

# Compositition of current assets:

An analysis of current assets component enables one to examine in which

component the working capital funds are locked up. A large tie-up of funds

in inventories effects profitability of the business adversely owing to carry

over costs. In addition losses are likely to occur by way of depreciation,

decay, obsolescence, evaporation and so on. Receivables constituting

another component of current assets. If the major portions of current assets

are made up of cash alone, the profitability will e decreased because cash is

a non-earning asset. If the portion of cash balance is excessive, then it can be

said that management is not efficient to employ the surplus cash.

Page | 48


# Debtors Turnover Ratio: = Sales . . x 365 Debtors

This ratio shows the extent of trade credit granted and the efficiency

in the collection of debts. Thus, it is an indicative of efficiency of trade

credit management. The lower the debtors to sales ratio, the better the trade

credit management and the better the quality (liquidity) of debtors. The

lower debtors mean prompt payment by customers. An excessively long

collection period, on the other hand, indicates a very liberal, ineffective and

inefficient credit and collection policy.

# Average collection Period (in days) = Debtors . x 365 Sales

Average collection period, which measures how long it takes to

collect amounts from Debtors. The actual collection period can be

compared with the stated credit terms of the company. If it is longer than

those terms, then this indicates some insufficiency in the procedures for

collecting debts.

# Bad debts to sales = Bad Debts . . Sales

This ratio indicates the efficiency of the control procedures of the

company. The actual ratio is compared with the target or norm to decide

whether or not it is acceptable.

# Creditors Turnover Period (in days) = Creditors . . x 365 Purchases

Page | 49


The measurement of the creditor turnover period shows the average

time taken to pay for goods and services purchased by the company. In

general the longer credit period achieved the better; because delays in

payment mean that the operations of the company are being financed interest

free by supplier’s funds. But there will be a point beyond which, if they are

operating in a seller’s market may harm the company. If too long period is

taken to pay creditors, the credit rating of the company may suffer, thereby

making it more difficult to obtain suppliers in the future maintained.

# Working Capital Leverage:

The working capital leverage refers to the impact of level of

working capital on company’s profitability. Working capital leverage

measures the responsiveness of ROCE (Return on Capital Employed) for

changes in assets.

Working Capital Leverage = Current assets s Total Assets – Current Assets

#

Page | 50


Committee’s related to working Capital

# Tandon Committee

# Chore Committee

# Nayak Committee

Tandon Committee Report

Like many other activities of the banks, method and quantum of short-

term finance that can be granted to a corporate was mandated by the Reserve

Bank of India till 1994. This control was exercised on the lines suggested by

the recommendations of a study group headed by Shri Prakash Tandon.

The study group headed by Shri Prakash Tandon, the then Chairman

of Punjab National Bank, was constituted by the RBI in July 1974 with

eminent personalities drawn from leading banks, financial institutions and a

wide cross-section of the Industry with a view to study the entire gamut of

Bank's finance for working capital and suggest ways for optimum utilization

of Bank credit. This was the first elaborate attempt by the central bank to

organize the Bank credit. The report of this group is widely known as

Tandon Committee report. Most banks in India even today continue to look

at the needs of the corporate in the light of methodology recommended by

the Group.

As per the recommendations of Tandon Committee, the corporates

should be discouraged from accumulating too much of stocks of current

assets and should move towards very lean inventories and receivable levels.

The committee even suggested the maximum levels of Raw Material, Stock-

in-process and Finished Goods which a corporate operating in an industry

Page | 51


should be allowed to accumulate These levels were termed as inventory and

receivable norms. Depending on the size of credit required, the funding of

these current assets (working capital needs) of the corporates could be met

by one of the following methods:

# First Method of Lending:

Banks can work out the working capital gap, i.e. total current assets

less current liabilities other than bank borrowings (called Maximum

Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent

of the gap; the balance to come out of long-term funds, i.e., owned funds and

term borrowings. This approach was considered suitable only for very small

borrowers i.e. where the requirements of credit were less than Rs.10 lacs

# Second Method of Lending:

Under this method, it was thought that the borrower should provide

for a minimum of 25% of total current assets out of long-term funds i.e.,

owned funds plus term borrowings. A certain level of credit for purchases

and other current liabilities will be available to fund the build up of current

assets and the bank will provide the balance (MPBF). Consequently, total

current liabilities inclusive of bank borrowings could not exceed 75% of

current assets. RBI stipulated that the working capital needs of all borrowers

enjoying fund based credit facilities of more than Rs. 10 lacs should be

appraised (calculated) under this method.

# Third Method of Lending:

Under this method, the borrower's contribution from long term funds

will be to the extent of the entire CORE CURRENT ASSETS, which has

been defined by the Study Group as representing the absolute minimum

Page | 52


level of raw materials, process stock, finished goods and stores which are in

the pipeline to ensure continuity of production and a minimum of 25% of the

balance current assets should be financed out of the long term funds plus

term borrowings.

Other major recommendations of the committee were:

# No slip back in current ratio, normally.

# Classification guidelines for Current assets and current liabilities.

# Identification of excess borrowing.

# Information system, which was modified by Chore Committee

Recommendations.

# Bifurcation of limits into loan and demand component

Chore Committee Recommendations:

On reviewing the monetary and credit trends for the business session

of 1978-79, the RBI felt the extensive use of case credit system was a

deterrent factor in implementing the credit regulatory measures by the banks.

The Tandon committee had recommended the bifurcation of credit limits

into a deemed and a fluctuating cash credit component. But implementation

of this recommendation was very slow. The Reserve Bank therefore thought

that this problem needed a deep study and a decision was taken to entrust the

work to a working group. Accordingly a working group to review the system

of cash credit constituted in April 1979 under the chairmanship of Shri. K.

B. Chore, chief officer DBCOD reserve bank of India.

Recommendations:

Page | 53


The committee submitted its final report in August 1979. The major areas

covered by there commendations are

# Use different types of advances, cash credit, and loan and bills all

types to continue.

# Bifurcation of cash credit limit into demand loans and fluctuating cash

credit portions not favored because:

1. For seasonal industries is too much; for sales season period

the account may be in credit in which case the loan portion

should be nil.

For non-seasonal industries the difference is too narrow to be of

any help to the banks

# Separate limits to be granted for peak level an d non peak level credit

requirements.

# All borrowers (except sick units) with working capital requirements of

rupees ten lakhs and above to be placed under second method of

lending by the Tandon committee.

# The flow of information from borrower to banks to be simplified.

# Bank to take up financing a portion of raw materials by way of

drawee bills.

Nayak Committee:

Considering the contribution of the SSI sector to the overall industrial

production, exports and employment and also recognising the need to give

fillip to this sector, a special package of measures was devised by RBI

(during April 1993) to ensure adequate and timely credit to this sector.

While doing so the recommendations of the PR Nayak committee were

taken into account. Examination of bank finance profile of working capital

Page | 54


to the small scale sector by the committee has revealed that this sector as a

whole received a level of working capital which was only 8.1% of the its

output. The village industries and the smaller tiny industries among them

could get working capital finance to the extent of only about 2.7% of their

output.

The salient features of the package are set out below:

# Banks have been advised to give preference to village industries, tiny

industries and other small scale units in that order, while meeting the

credit requirements of small scale sector.

# The banks should step up the credit flow to meet the legitimate

requirements of the SSI sector in full during the 8th 5-year plan. For

this purpose the banks should draw up annual credit budget for the

SSI sector on a bottom-up basis. Each branch of the banks should

prepare an annual budget in respect of working capital requirements

of all SSIs before the commencement of the year. Such budgeting

should cover

(a) Functioning units which already have borrowing limits with the

branch

(b) New units and units whose proposals are under appraisal and

(c) Sick units under nursing and also sick units found viable after

discussion/ feedback received from the borrowing units.

Page | 55


The budget should take into account, among other relevant aspects,

normal sale growth, price rise during the past year, anticipated spurt in

business etc.

# It is desirable that a single financing agency meets both the

requirement of the working capital and term credit for small scale

units. The Single Window Scheme of SIDBI enables the same agency

SFC or commercial bank, as the case may be, to provide term loans

and working capital to SSI units having a project outlay upto Rs. 20

lac and working capital requirement upto Rs. 10 lac. The banks have

been advised to adopt this approach.

# At present norms for inventory and receivable are applicable to all

units enjoying aggregate fund based working capital credit limits of

Rs. 10 lac and above from the banking system. Units enjoying limit of

Rs. 10 lac and above but upto Rs. 50 lac are subject to the 1st method

of lending. Henceforth for the credit requirements of village

industries, tiny industries and other SSI units having aggregate fund-

based working capital credit limits upto Rs. 50 lac (subsequently

raised to Rs. 1 crore and Rs. 200 lac during April 1997, to Rs.400 lac

during August 1998 and further to Rs.500 lac during May 1999) from

the banking system, the norms for inventory and receivables and also

the 1st method of lending will not apply. Instead such units may be

provided working capital limits computed on the basis of a minimum

of 20% of their projected annual turnover for new as well as existing

units.

Page | 56

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