SUMMER TRAINING PROJECT REPORT ON QUALITY MANAGEMENT IN R-TEK MOULD FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF DEGREE OF M.COM BUSINESS INNOVATIONS OF PANJAB UNIVERSITY CHANDIGARH (Under the Innovative Programme Schedule of University Grants Commission) Under the guidance of supervision of Mr. Ashwani Bhalla Singh Under the Mr. Ravinder

Submitted By: Anuj Kumar Kapoor M.Com Business Innovation 2012-2013

POST GRADUATE DEPARTMENT OF COMMERCE AND BUSINESS INNOVATIONS S.C.D GOVERNMENT COLLEGE LUDHIANA CERTIFICATE This is to certify that the project work done on Quality Management in R-Tek Mould is a bonafide work carried out by Mr. Anuj Kumar Kapoor under my supervision and guidance. The project report is submitted towards the partial fulfilment of 2 year, full time degree of M.Com Business Innovations

This work has not been submitted anywhere else for any other diploma/degree. The original work is carried during 1st June 2012 to 15th July 2012 in R-Tek Mould Name and Sign of Industry Guide Name and Sign of Faculty Mr. Ravinder Singh Mr. Ashwani Bhalla _________________ __________________ Date: Name of Student : Anuj Kumar Kapoor Roll no. ___________________________ ACKNOWLEDGEMENT This report could not have been possible without the help of certain people and utilising support of R-Tek Mould. I would like to express my sincere gratitude towards Mr. Ravinder Singh (General Manager) for his indicious and technical guidance, invaluable and constructive criticism and vital encouragement throughout the entire project which helped me to get inside into the working of R-Tek Moulds and to relate the theoretical knowledge imparted by our esteemed faculty members in the course of M.Com Business Innovations to the present scenario of corporate body. I also express my sincere thanks to Dr. Ashwani Bhalla professor and program co-ordinator and my respective Major Advisor Mrs. Leenu Narang, professor of Department of Commerce and Business Innovation, S.C.D. Government College Ludhiana, under whose able guidance this project was completed. I express my sincere thanks to the whole R-Tek for giving all the facilities during my training period.

Indeed, the words at my command are not adequate to convey my heart full thanks to respective parents for the encouragement and inspiration given by them. Anuj Kumar Kapoor Contents

Chapter 1 Introduction to R-Tek Mould

R-Tek Mould came into existence in 1985 under the very special guidance of Sh. Kulwant Singh Matharu. Started from a scratch, much more research and development work was done till 1990 and the lead was taken by Sh. Ravinder Singh Matharu who is son of Sh. Kulwant Singh Matharu. The concern was established as a small-scale industrial unit and now its one of leading suppliers of plastic injection Moulding tools, pressure, rubber compression moulds and polyurethane moulds and their mouldings. It is serving the industry for about 17 years.

Besides straightening its hold on domestic market, the company has strong potential in foreign market. The company has done some marvellous jobs dealing with some leading brands like J.J. Jonex for Sports Dye and mould, Indian Air Force for spare parts, tools and dye, Aluminium Casting, with Eastman Industries the company is dealing Injection Moulds, Hero Cycle Limited is buying tool and dye, Em Cee Cee Sports Private Limited is dealing in tools and dye. The company is enjoying a prestigious market all over the globe and working with a motive of customer satisfaction. The company prioritize is maintaining quality, accuracy, competitive prices and professional work force. R-Tek Mould strictly adheres to international quality and safety norms of the automobile industry followed by leading manufacturers and automobile giants and works to ensure zero-defect products. The company has a dedicated quality assurance department along with a team of experienced quality control supervisors, who ensures quality at all levels of production process. The company was endowed with ISO 9001:2008 certification and is in process to achieve more in this line. The company is in process of getting TS 16949 certification Autocrat is an integral part of R-Tek Mould. Autocrat is a reputed company since 1992, engaged in manufacture of Automobile parts,

Bike Headlights Lens, Motorcycle parts, Bike Visor, Auto parts, Visors, and other plastic products. It is one of leading manufacturers, suppliers of Headlight glass. It provides headlight glass to Bajaj CT 100, Bajaj Discover, Bajaj Platina, Bajaj Pulsar, and Honda Activa. These products are fabricated with the high grade raw material that is procured from reliable vendors to ensure that the products are of high quality and meet the global standards. Objectives of the Company Excellent distribution network To achieve and maintain a lead position as manufacturer of automotive components To ensure steady growth in business and fulfil its social obligations To build up high degree of customer confidence by sustaining standards of excellence in product quality. To develop human resource to increase their efficiency and productivity Care of environment and to discharge factory waste responsibly

 To build a strong customer base by satisfying them Maintaining high quality output by implementing various quality checks

Organisational Chart

Departments The researcher encompassed the study of four departments namely Accounts and Administration, Designing, Production and

Marketing. The basis for departmentalization was functional.

Accounts

And

Administration

Department:

This

Department is headed by Mr. Balwinder Singh. Two executives assist him. This department is broadly concerned with acquisition and use of funds by the company. It also analyzes plans and controls the companys financial affairs. Moreover, the in house administration of the company is also taken care of. It also includes maintenance of showroom and a look into the requirements and problems of day to day administration. In a nutshell this department deals with trouble shooting any problem.

Designing Department: This department is headed by Mr Inderpal Singh. Eight creative designers assist him. The team of designer tailor makes the products according to the needs of

customers. Two aspects namely affordability and aesthetics are focused upon. Major activities under taken in this department are as follows:

Setting the normal design: According to initial measurement told by customer, a normal design is set. Once the normal design is finalised by the customer, a designer accompanied by marketing personnel visits the construction site and takes the final measurement. Then according to it a design is set and the price quotation is made.

Setting production design: When the deal is finalized and 50 per cent of amount is received from customer, the designer makes the production design. The design clearly demarcates the technicalities so that it becomes easier for production personnel to understand.

Innovative designs: The team of designers also trigger out the brain cells to create innovative designs.

Marketing Department: This department deals with springboard of all activities. The department is headed by Mr. Sandeep Sharma. Eight marketing executives assist him. Various activities like product packaging, branding,

advertisement and sales promotions are taken care under this. Marketing department is assisted by two IT personals who help in online advertising and Search Engine Optimisation (SEO).

Human Resource Department: This department is headed by Mr. Tajinder Singh. He is assisted by 2 executives. Various aspects of HR are taken care of :

Leave Facility: All employees are entitled to 12 days of casual leave and 2 days of sick leave (monthly). In case of long leave, say more than a week, one need to inform it 10-12 days before.

Recruitment: The company spells out its requirements to the consultancies about the suitable candidates. Candidates are recruited after proper training.

Training: A selected candidate is put on training for 15 days to 1 month. During this period, he is not given any individual project.

Job Rotation: Job rotation is adopted by the company so that there is development of multi-faceted skills in vacancies and to cope up with increasing work load.

Production Department: This department is headed by Mr. Abhishek Kumar. Four supervisors are in charge of four different activities such as quality control, product analyzing, production and dispatch.

2 Persons Person

2 Persons

26 Persons

(Machine operators And helpers)

Quality Control: This sub department is mainly concerned with the inspection of raw materials and finished products. The raw materials are supplied mainly by four companies namely Novapan, Spacewood, Bhutan Board and Nepal Board and Nuwood.

Product Analyzing: This sub department is mainly concerned with targeting and scheduling. After receiving the product design, it targets as to when the work needs to be completed and schedules the whole process. Again, after completion of production and before dispatch, the product is thoroughly inspected here.

Production:

Twenty-six

comprising

of

machine

operators and helpers are involved in this sub department. It consists of five operations namely: Cutting, Moulding, Edge Bending, Boring and Hot Press and Post formed.

Dispatching: After the product is thoroughly inspected. The process of dispatching begins. The marketing

department helps the dispatching department in various ways.

Chapter 2

Literature Review of R-Tek

Infrastructure Infrastructure is one of the main reasons that they provide effective customisation services to their clients. R-Tek Mould has invested a lot in infrastructure and ensures all the requisite facilities are available in various sections of the company. Their infrastructure is equipped with latest and sophisticated machineries. The manufacturing unit is segregated into various departments such as research and development, quality assurance, production department, dispatching department, so that the business can be carried out in synchronised manner. Their infrastructure is segregated into following units: Quality Testing Production Research and Development

 Logistics Inventory and warehouse

Product Range On the strength of its expertise in the development and manufacturing components R-Tek has explored new horizons to provide diverse range of products.

Plastic Components

Headlight Glass

Achievements Due to premium quality products, they have achieved new hikes in the competitive market. Their products are widely applauded for its special features and unmatched quality. The products offered by R-TEK MOULD are widely used in many sectors. The company cater its products to the sectors such as:

Sports

Sanitary & Water supply Indian Railways Hand Tools Electrical Indian Defence and Air Force Automobile Textile Kitchen Ware Agricultural

Quotations That R-Tek Mould Use: Flying into the future, we shall rise above expectation and bring about a renaissance that is unparallel. Sourcing for better result. Engineered for unmatched perfection. Together we Excel. Company Profile Company Name: R-Tek Mould Office and Works: Street No. 7 1/2, Hargobind Nagar, Industrial Area - C, Ldh.

Email: autocratindia@gmail.com Website: www.rtekmould.com, www.autocrat.co.in Business Type: Manufacturer, Exporter, Service Provider Year of Establishment: 1985 Annual Turnover: Up to Rupees 1 Crore (approx.) Export Percentage: Up to 20 per cent Primary Competitive Advantage: Experienced Research and Development Department Good Financial Position and Total Quality Management Large Product Line No. of Employees: 50-60 People Major Markets: Indian Subcontinent, Australia, New Zealand, East Asia, North Africa, Caribbean

THEORETICAL ASPECTS OF THE PROJECTS

NEED FOR WORKING CAPITAL The need for working capital (gross) or net current assets cannot be over emphasized. The objective of financial decision making is to maximise the shareholders wealth. To achieve this, it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depended upon the magnitude of the sales, among other things. A successful sales programme is, in other words, necessary for earning profits by any business enterprise. However, sales do not convert into cash instantly; there is invariably a time-lag between the sales of goods and the receipt of cash. There is, therefore, a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realisation of cash against goods sold. Therefore, sufficient working capital is necessary to sustain sales activity. Technically, this is referred to as the operating or cash-cycle. The operating cycle can be said to be at the heart of the need for working capital. The continuing flow from cash to suppliers, to inventory, to accounts receivable and back into cash is what is called the operating cycle. In other words, the

term cash cycle refers to the length of time necessary to complete the following cycle of events. (1) (2) (3) Conversion of cash into inventory Conversion of inventory into receivables Conversion of receivable into cash.

If it were possible to complete the sequences instantaneously, there would be no need for current assets (working capital). But since it is not possible, the firm if forced to have current assets. Since cash inflows and cash outflows do not match, firms have to necessarily keep cash or invest in short term liquid securities so that they will be in a position to meet obligations when they become due. Similarly, firms must have adequate inventory to guard against the possibility of not being able to meet a demand for their products. Adequate inventory, therefore, provides a cushion against being out of stock. If firms have to be competitive, they must sell goods to their customers on credit which necessitates the holding of accounts receivable. It is in these way that an adequate level of working capital is absolutely necessary for smooth sales activity which, in turn, enhances the owners wealth.

The operating cycle consists of three phases : In phase 1, cash gets converted into inventory. This would include purchase of raw materials; conversion of raw materials into work-in-progress, finished goods and terminate in the transfer of goods to stock at the end of the manufacturing process. In the case of trading organisation, this phase would be shorter as there would be no manufacturing activity and cash will be converted into finished goods directly. The phase will, of course, be totally absent in case of service organisations. Phase 3
Receivables

Phase Phase 1
Inventory

In phase 2 of the cycle, the inventory is converted into receivables as credit sales are made to customers. Firms which do not sell on credit will obviously not have phase 2 of the operating cycle. The last phase, phase 3, represents the stage when receivables are collected. This phase completes

the operating cycle. Thus, the firm has moves from cash to inventory, to receivables and to cash again. MANAGEMENT OF WORKING CAPITAL Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter-relationships between them. Its operational goal is to manage the current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. The term working capital refers to the net working capital (NWC) i.e. , current assets minus current liabilities. With reference to the management of working capital, net working capital represents that part of the current assets which are financed with long term funds. The level of NWC has a bearing on the profitability as well as the risk in the sense of the inability of the firm to meet obligations as and when they become due. Therefore, the trade-off between profitability and risk is an important element in the evaluation of the level of NWC of a firm. In general, the higher the NWC, the lower the risk, as also the lower is the

profitability and vice-versa. Thus, the NWC measures the degree of risk in the management of working capital. Apart from the profitability-risk trade-off, the determination of the financing mix is the second ingredient of the theory of working capital management. The financing mix refers to the proportion of current assets to be financed by current liabilities and long-term sources. One approach to determine the financing mix is the hedging approach, according to which the long-term funds should be used to finance the fixed/core portion of the current assets and the purely temporary/seasonal requirements should be met out of shortterm funds. This approach is a high-profit, high-risk financing mix. According to the second approach, namely the conservative approach, the estimate total requirements of the current assets should be financed from long-term sources and the short-term funds should be used only in emergency situations. If effect, the conservative approach is a low-profit, lowrisk combination. Neither of these two approaches is suitable for efficient working capital management. A trade-off between these two extremes provides a financing plan between these two approaches, and therefore, an acceptable

financing strategy from the view point of the management of working capital. CASH MANAGEMENT Cash management is one of the key areas of working capital management. There are 4 motives for holding cash : (i) transaction motive (ii) precautionary motive, (iii) speculative motive, and (iv) compensating motive. The transaction motive refers to the holding of cash to meet anticipated obligations whose time is not perfectly synchronised with cash receipts. The cash balances held in reserve for random and unforeseen fluctuations in cash flows are called as precautionary balances. The speculative motive indicates the desire of a firm to take advantage of

opportunities which present themselves at unexpected moments and which are typically outside the normal course of business. The compensating motive means keeping the bank balance sufficient to earn a return equal to the cost of free service provided by the banks.

The basic objectives of cash management are to reconcile two mutually contradictory and conflicting tasks : to meet the payment schedule and to minimise funds committed to cash balances. Cash budget is probably the most important tool in cash management. It is a device to help a firm to plan and control the use of cash. The cash position of a firm as it moves from one period to another period is high lighted by the cash budget. A cash budget has normally three parts, namely, cash collections, cash payments and cash balances. The major sources of cash receipts and payments are operating and financial. The operating sources are repetitive in nature while the financial sources are non-recurring.

The cash management strategies are intended to minimise the operating cash balance requirement. The basic strategies that can be employed are (i) stretching accounts payable without affecting the credit of the firm, (ii) efficient inventory management and (iii) speedy collections of accounts receivable. Some of the specific techniques and processes for speedy collection of receivables from customers are ensuring

prompt

payment

from

customers

and

early

payment/conversion into cash.

Concentration banking and Lock-box system deserves specific mention as principal methods of establishing a decentralised collection network. The techniques to delay payments of accounts payable include avoidance of early payment, centralised disbursements and float. Marketable securities are an outlet for surplus cash as liquid security/asset. To be liquid a security must have two basis characteristics, i.e., a ready market and safety of principal. The selection criteria for marketable securities include the evaluation of financial risk, interest-rate risk, liquidity, taxability and yield among different financial assets. The prominent marketable securities available for investment are : treasury bills, negotiable certificates of deposits, commercial paper,

bankers acceptance, units of Unit Trust of India, intercorporate deposits, inter-bank call money, commercial bills under the bill market scheme and short-term deposits. MANAGEMENT OF RECEIVABLES When a firm makes an ordinary sale of goods and servies and does not receive payment, the firm grants trade credit and creates accounts receivable which would be collected in future. Thus, accounts receivable represent an extension of credit to customers, allowing them a reasonable period of time, in which to pay for the goods/services which they have received. The objective of receivables management is to have a tradeoff between the benefits and costs associated with the extension of credit. The benefits are increased sales and associated increased profits/marginal contribution. The major categories of cost of accounts receivable are collection costs, capital costs, delinquency costs and default costs. The management of receivables involves crucial decision in three areas : (i) credit policies, (ii) credit terms, and (iii)

collection policies. The credit policy of a firm provides the framework to determine whether or not to extend credit to a customer and how must credit to extend. The two broad dimensions of credit policy decision of a firm are credit standards and credit analysis. The term credit standards represents the basic criterion for the extension of credit to customers. The criterion and, therefore, standards can be tight/restrictive or liberal/non-restrictive. The credit analysis component of credit policies includes obtaining credit information from different sources and its analysis. The second decision-area in receivables management is the credit terms, The credit terms specify the repayment terms, comprising credit period, cash discount, if any, and cash discount period. The third area involved in the management of receivables is collection policies. It refers to the procedure followed to collect accounts receivable when they become due. The two relevant aspects are the degree of efforts to collect the over dues and the type of collection effort.

The framework of analysis of all the three decision areas in receivables management is to secure a trade-off between the costs and benefits of the measurable effects on the sales volume, capital cost due to change in accounts receivable, collection costs, and bad debts and so on. The alternative will be selected when the benefits exceed the costs. INVENTORY MANAGEMENT The term inventory refers to assets which will be sold in future in the normal course of business operations. The assets which the firm stores as inventory in anticipation of need are raw materials, work-in-process/semi-finished goods and finished goods. The management of inventory from the view point of financial manager is different from the management of other current assets in that practically all the functional areas are interest. The job of the finance manager is to reconcile the conflicting view points of the various functional areas regarding the appropriate inventory level. The objectives of inventory management consists of two counter-balancing parts, namely, to minimise investments in inventory and to meet the demand for products by efficient

production and sales operations. In operational terms, the goal of inventory management is to have a trade-off between costs and benefits at different levels of inventory. The costs of holding inventory are ordering cost and carrying cost. The major benefits of holding inventory are in the area of purchasing, production and sales. The non-mathematical inventory management techniques illustrated here are : (i) ABC system which is useful in determining the type and degree of control on inventory; (ii) EOQ model which reveals the size of order for the acquisition of inventory by the firm; (iii) the re-order point which shows the level of inventory at which order should be placed to replenish inventory; and (iv)safety stock, i.e. the minimum additional inventory to serve as a safety margin to meet an unanticipated increase in resulting from an unusually high demand and/or inventory. A B C System an uncontrollable late receipt of incoming

The first step in the inventory control process is classification of different types of inventories to determine the type and degree of control required for each. The A B C system is a widely-used classification technique to identify various items of inventory for purposes of inventory control. This technique is based on the assumption that a firm should not exercise the same degree of control on all items of inventory. It should rather keep a more rigorous control on items that are (1) most costly, and/or (2) slowest-turning while items that are less expensive should be given less control effort. On the basis of the cost involved, the various inventory items are, according to this system, categorised into three classes : (1) A (2) B and (3) C. The items included in group A involved the largest investment. Therefore, inventory control should be the most rigorous and intensive and the most sophisticated inventory control techniques should be applied to these items. C group consists of items of inventory which involve relatively small investments although the number of items is fairly large. These items deserve minimum attention. B group stands midway. It deserves less attention than A but more than C. It can be controlled by employing less sophisticated techniques.

The task of inventory management is to properly classify all the inventory items into one of these three groups/categories. The typical break-down of inventory items is as shown in following Table : Inventory Break-down Between Number of items and Inventory Value Group Value (%) A B C 15 30 55 ---100 __________ Some points stand out from above Table. While group A is the least important in terms of the number of items, it is by far the most important in terms of the investments involved. With only 15% of the number, it accounts for as much as 70% of the total value of inventory. The firm should direct most of its 70 20 10 ---100 No of Items (%) Inventory

_________________________________________________

inventory control efforts to the items included in this group. The items comprising B group account for 20% of the investments in inventory. They deserve less attention that A, but, more than C, which involves only 10% of the total value although number wise its share is as high as 55%. Economic Order Quantity (EOQ) Model After various inventory items are classified on the basis of the A B C analysis, the management becomes aware of the type of control that would be appropriate for each of the three categories of the inventory items. The A group of items warrants the maximum attention and the most rigorous control. A key inventory problem particularly in respect of the Group A items relates to the determination of the size or quantity in which inventory will be acquired. In other words, while purchasing raw materials or finished goods, the questions to be answered are : How much inventory should be bought in one lot under one order on each replenishment ? Should the quantity to be purchased be large or small ? Or, should the requirement of materials during a given period of time (say, six months or one year) be

acquired in on lot or should it be acquired in instalments or in several small lots ? Such inventory problems are called order quantity problems. The determination of the appropriate quantity to be purchased in each lot to replenish stock as a solution to the order quantity problem necessities resolution of conflicting goals. Buying in large quantities implies a higher average inventory level which will assure (1) smooth production/sale operations, and (2) lower ordering or set-up- costs. But, it will involve higher carrying costs. On the other hand, small orders would reduce the carrying costs of inventory by reducing the average inventory level but the ordering costs would increase as there is a likelihood of interruption in the operations due to stock-outs. A firm should place neither too large nor too small orders. On the basis of a trade-off between benefits derived from the availability of inventory and the cost of carrying that level of inventory, the appropriate or optimum level of the order to be placed should be determined. The optimum level of inventory is popularly referred to as the Economic Order Quantity (EOQ). It is also known as the economic lot size. The economic order quantity may be defined as that level of inventory order that minimises the total cost associated with

inventory management. As explained in the earlier section dealing with the objectives of inventory management, the costs associated with inventories are (1) ordering costs and (2) carrying costs. Stated with reference to cost perspectives, EOQ refers to the level of inventory at which the total cost of inventory comprising acquisition/ordering/set-up costs and carrying costs is minimal. For analysing the EOQ, as an inventory management technique, several sophisticated mathematical models are available.Illustrate here the analysis of EOQ on the basis of simple non-mathematical approach. Nevertheless, the main elements of the order quantity problem are covered by the analytical method followed here. Assumptions The EOQ model, as a technique to determine the economic order quantity is based on three restrictive assumptions, namely : (i) The firm knows with certainty the annual usage (consumption) of a particular item of inventory.

(ii)

The rate at which the firm uses inventory is steady over time.

(iii) The orders placed to replenish inventory stocks are received at exactly that point in time when inventories reach zero. In addition, it may also be assumed that ordering and carrying costs are constant over the range of possible inventory levels being considered.

Approaches The EOQ model can be illustrated by (1) the long analytical approach or trial and error approach , and (2) the short-cut or simple mathematical approach. Trial and Error Approach Given the total requirements of inventory during a given period of time depending upon the inventory planning horizon, a firm has different alternatives to purchase its inventories.

For instance, it can buy its entire requirements in one single lot at the beginning of the inventory planning period. Alternatively, the inventories may be procured in small lots periodically, say weekly, monthly, quarterly, six-monthly and so on. If the purchases are made in one big lot, the firms average inventory holding would be relatively large whereas it would be relatively small when the acquisition of inventory is in small lots : the smaller the lot, the lower the average, the lower the average inventory and vice versa. High average inventory would involve high carrying costs. On the other hand, low inventory holdings are associated with high ordering cost. The trial and error or long analytical approach for the determination of EOQ uses different permutations and combinations of lots of inventory purchases so as to find out the least ordering and carrying cost combination. In other words, according to this approach, the carrying and acquisition costs for different sizes of orders to purchase inventories are computed and the order-size with the lowest total cost (ordering plus carrying) of inventory is the economic order quantity. Order Point

The EOQ technique determines the size of an order to acquire inventory so as to minimise the carrying as well as the ordering costs. In other words, the EOQ provides an answer to the question : how much inventory should be ordered in one lot ? Another important question pertaining to efficient inventory management is : when should the order to procure inventory be placed ? This aspect of inventory management is covered under the order point problem. The re-order point is stated in terms of the level of inventory at which an order should be placed for replenishing the current stock of inventory. In other words, re-order point may be defined as that level of inventory when fresh order should be placed with the suppliers for procuring additional inventory equal to the economic order quantity. Although some sophisticated re-order point formulae are available, It is based on the following assumptions : (i) (ii) constant daily usage of inventory, fixed lead time.

In other words, the formulae assumes condition of certainty. The re-order point = Lead time in days x average daily usage of inventory

The term lead time refers to the time normally taken in receiving the delivery of inventory after placing orders with the suppliers. It covers the time span from the point when a decision to place an order for the procurement of inventory is made to the actual receipt of the inventory by the firm. Another way of saying it is that the lead time consists of the number of days required by the suppliers to receive and process the order as well as the number of days during which the goods will be in transit from the supplier. The lead time may also be called as the procurement time of inventory. The average usage means the quantity of inventory consumed daily. We can, therefore, define re-order point as that inventory level which should be equal to the consumption during the lead time. COMPUTATION OF WORKING CAPITAL The two components of working capital (WC) are current assets (CA) and current liabilities (CL). They have a bearing on the cash operating cycle. In order to calculate the working capital needs, what is required is the holding period of various

type of inventories, the credit collection period and the credit payment period. The WC also depends on the budgeted level of activity in terms of production/sales. The calculation of WC is based on the assumption that the production/sales is carried on evenly throughout the year and all costs accrue similarly. The steps involved in estimating the different items of CA and CL are as follows :ESTIMATION OF CURRENT ASSETS Raw Material Inventory The investment in raw materials inventory can be estimated on the basis of Budgeted production Cost of raw Average inventory (in units) x material(s) x holding period per unit (months/days) 12 months/365 days

The relevant cost to determine work-in-process investments are the proportionate share of cost of raw materials and conversion cost (labour and manufacturing overhead costs excluding (depreciation).

Symbolically

Budgeted span Production in-process (in units)

Estimated workx in-process cost per unit 12 months/365 days

Average x of

time work-

inventory (months/days)

Finished Goods Inventory The WC required to finance the finished goods inventory is given by factors summed up Budgeted Production period (in units) Manufacturing Cost Finished goods x per unit (excluding x holding depreciation) (months/days) 12 months/365 days

Debtors The WC tied up in debtors should be estimated in relation to total cost price (excluding depreciation). Symbolically

Budgeted collection Credit sales (months/days) (in units)

Cost of sales per x unit (excluding

Average x period

debt

depreciation) 12 months/365 days

Cash and Bank Balances Apart form WC needs for financing inventories and debtors, firms also find it useful to have some minimum cash balances with them. It is difficult to lay down the exact procedure of determining such an amount. This would primarily be based on the motives for holding cash balances of the business firm, attitude of management torwards risk, the access to the borrowing sources in times of need and past experience, etc.

ESTIMATION OF CURRENT LIABILITIES The working capital needs if business firms are lower to the extent such needs are met through the current liabilities (other than bank credit) arising in the ordinary course of the business. The important current liabilities (CL), in this context are, trade-creditors, wages and overheads :

Trade Creditors : Budgeted yearly Raw material Credit period Production x requirement allowed by creditors (in units) per unit (months/days) 12 months/365 days Note : Proportional adjustment should be made to the cash purchases of raw materials. Direct Wages : Budgeted yearly lag in Production payment of wages (in units) x cost per unit x (months/days) 12 months/365 days Direct labour Average time-

The average credit period for the payment of wages approximates to a half-a-month in the case of monthly wage payment : 1st days monthly wages are paid on 30th day of the month, extending credit for 29 days, 2nd days wages are, again, paid on 30th , extending credit for 28 days, and so on. Average credit period approximates to half-a-month). Overheads (other than depreciation and amortisation) :

Budgeted yearly in Production overheads (in units)

Overhead cost x per unit x

Average timepayment of

(months/days)

12 months/365 days The amount of overheads may be separately calculated for different types of overheads. In the case of selling overheads, the relevant item would be sales volume instead of production volume.

Working capital meaning of working capital Capital required for business can be classified under two main categories via, 1) fixed capital 2) working capital Every business needs funds for two purposes for its establishment and to carry out its day-to-day operations. Long terms funds are required to carry production facilities through purchase of fixed assets such as p&m, land, building, furniture, etc. investments in these assets represent that part of firm capital which is blocked. On permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the

purchase of raw material, payment of wages and other day-to-day expenses etc. In the words of SHUBIN working capital is that amount of funds necessary to cover the cost of operating the enterprise. According to GENESTENBERG circulating capital means current assets of a company that are charged in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables to cash. KINDS OF WORKING CAPITAL Working capital may be classified into two ways - on the basis of concepts - on the basis of time On the basis of concepts working capital is classified as gross working capital & net working capital. On the basis of time working capital is classified as permanent or fixed working capital & temporary or variable working capital. GROSS WORKING CAPITAL It represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in the total current assets of the enterprise. Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of normally one accounting year. EXAMPLES OF CURRENT ASSETS ARE 1. cash in hand & bank balance 2. Bills receivables.

3. 4. 5. 6. 7.
8.

sundry debtors ( less provision for bad debts) Short term loans & advances. Inventories of stocks. Temporary investments of surplus funds. Prepaid expenses. accrued incomes

NET WORKING CAPITAL It is the excess of current assets over current liabilities. Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive & the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to pay in the ordinary course of business within the short period of normally one accounting year out of the current assets or the incomes of the business. EXAMPLES OF CURRENT LIABILITIES ARE 1) Bills payable 2) Sundry creditors or accounts payable 3) Accrued or outstanding expenses 4) Short term loans, advances & deposits 5) Dividend overdraft 6) Provision for taxation, if it does not amount to appropriation of profit NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES PERMANENT OR FIXED WORKING CAPITAL It is the minimum amount which is required to ensure effective utilization of fixed facilities & for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its

normal business operations. For example , every firm has to maintain a minimum level of raw-material, work in process, finished goods & cash balance. The minimum level of current assets or called fixed or permanent working capital as this part of working capital is permanently blocked in current assets. As the business grows, the requirement of permanent working capital also increases due to the increase in current assets. The permanent working capital can further be classified as regular working capital and reserve working capital. Capital required to ensure circulation of current assets from cash to inventories, from inventories to receivables, and from receivables to cash and so on. Reserve working capital which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression, etc TEMPORARY OR VARIABLE WORKING CAPITAL It is that amount of working capital which is required to meet the seasonal demand and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet seasonal & special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research etc. IMPORTNCE OF ASEQUATE WORKING CAPITAL Working capital is the blood & nerve center 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 the business. No business can run successfully without an adequate amount of working capital. The main

advantages of maintaining adequate amount of working capital are as follow Solvency of the business Adequate working capital in maintaining solvency of business by providing un interrupted flow of production. 1. GOODWILL- sufficient working capital enables a business concern to make prompt payments & hence helps increasing & maintaining goodwill. 2. EASY LOANS- A concern having adequate working capital, high solvency& good credit standing can arrange loans from banks &other on easy and favorable terms. 3. CASH DISCOUNT- adequate working capital also enables a concern to avail cash discount on the purchases and hence reduce costs. 4. REGULAR SUPPLY OF RAW MATERIAL- Sufficient working capital ensures regular supply of raw material & continuous production. 5. REGULAR PAYMENT OF SALARIES, WAGES & OTHER DAY - TO - DAY COMMITMENTS. A company which has ample working capital can make regular payment of salaries, wages & other day to day commitments which raises the morale of its employees, increases their efficiency, reduces wastages & costs and enhances production & profits. 6. EXPLOITAION OF FAVORABLE MARKET CONDITIONS- Only concerns with adequate working capital can exploit favorable conditions such as purchasing its requirements in bulk when the prices are lower & by holding its inventories for higher prices. 7. ABILITY TO FACE CRISIS- Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

QUICK ANDREGULAR RETURN ON INVESTMENTS- Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividend to its investors, a there may not be much pressure to plough back profits. This gains the confidence of its investors & creates a favorable market to raise additional funds in the future. 9. HIGH MORALE- Adequacy of working capital creates an environment of security, confidence, and high morale and creates overall efficiency in the business.
8.

EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate working capital to run its business operations. I should have neither redundant nor excess working capital or inadequate nor shortage of working capital. Both excess as well as short working positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm. DISADVANTAGES OF EXCESSIVE WORKING CAPITAL 1. Excessive working capital means idle funds which earn no profits for the business & hence the business earns a proper rate of return on its investments. 2. When there is a redundant working capital, it may lead to unnecessary purchasing & accumulation of inventories causing more chances of theft, waste & losses. 3. Excessive working capital implies excessive debtors 7defective credit policy, which may cause higher incidence of bad debts.

4. 5.

6. 7.

It may result into overall inefficiency in the organization. When there is excessive working capital, relations with banks & other financial institutions may not be maintained. Due to slow rate of return on investments, the value of shares may also fall. The redundant working capital gives rise to speculative transactions.

DISADVANTAGE OF INADEQUATE WORKING CAPITAL 1) A concern which has inadequate working capital, cannot pay its short term liabilities in time. Thus, it will loose its reputation & shall not be able to get good credit facilities. 2) It cannot buy its requirements in bulk & cannot avail of discounts, etc. 3) It becomes difficult for the firm to exploit favorable market conditions & undertake profitable projects due to lack of working capital. 4) The firms cannot pay day to day expenses of its operations & it creates inefficiencies, increases costs & reduces the profits of the business. 5) It becomes impossible to utilize the fixed assets due to nonavailability of liquid funds. 6) The rate of return on investments also fails with the shortage of working capital. 1. NATURE OR CHARACTER OF BUSINESS The working capital requirement of a firm basically depends on the nature of its business. Public utility undertaking like electricity, water supply & railways need very limited working capital because they offer cash sales only & supply services, not products & as such no funds are tied up in the inventories & receivables. On the other hand trading &

financial firms require less investment in fixed assets but have to invest large amount of working capital. The manufacturing undertaking also require sizable working capital along with fixed investments. Generally speaking it may be said that public utility undertaking require small amount of working capital, trading & financial firms require sizeable working capital between these two extremes.
2.

SIZE OF BUSINESS/SCALE OF OPERATIONThe working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of business unit, generally larger will be the requirements of working capital. However, in some cases even a smaller concern may need more working capital due to high overhead charges, inefficient use of available resources & other economic disadvantages of small size.

3. PRODUCTION POLICY In certain industries the subject to wide fluctuations due to seasonal variations. The requirement of working capital, in such cases, depends upon the production policy. The production kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season & increased during the peak season. If the policy is to keep production steady by accumulating inventories it will require higher working capital. 4. MANUFACTURING PROCESS/LENGTH OF PRODUCTION CYCLE In manufacturing business, the requirements of working capital increases in direct

proportion to length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw-material & other supplies have to be carried for longer period in the process with progressive increment of labor & services costs before the finished product is finally obtained. Therefore, if there are alternative processes of production, the process with the shortest production period should be chosen. 5. SEASONAL VARITIONSIn certain industries raw material is not available throughout the year. They have to buy raw material in bulk during the season to ensure an uninterrupted flow & process them during the entire year. A huge amount is, thus, blocked in the form of material inventories during such season, which give rise to more working capital requirements. Generally, during the busy season, a firm requires larger working capital than in the slack season. . WORKING CAPITAL CYCLE- In the manufacturing concern, the working capital cycle starts with the purchase of raw material & ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw material and stores, its conversion into stocks of finished goods through work - in - progress with the progressive increment of labor and service costs, conversion of finished stock into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on . 7. RATE OF STOCK TURNOVER- There is a high degree of inverse co- relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need
6.

lower amount of working capital as compared to a firm having a lower rate of turnover. For example, in case of precious stone dealers, the turnover is very slow . they have to maintain a large variety of stocks and the movement of stocks is very slow. Thus, the working capital requirements of such a dealer shall be higher than of a provision store. 8. CREDIT POLICY- The credit policy of a concern in its dealing with debtors and creditors influence considerably the requirements of working capital. A concern that purchases its requirements on credit and sells its product/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working capital as very huge amount of funds are bound to be tied up in debtors or bills receivables. 9. BUSINESS CYCLE Business cycle refers to alternate expansion and contraction in general business activity. In a period of boom i.e, when the business is prosperous, there is a need for larger amount of working capital due to increase in sales , rise in prices, optimistic expansion of business , etc. on the contrary in the times of depression i.e, when there is a down swing of cycle, the business contracts, sales decline, and difficulties are faced in collections from debtors and firms may have a large amount of working capital lying idle. 10. RATE OF GROWTH OF BUSINESS- The working capital requirements of a concern increase with the growth and expansion of its business activities. Although, it is difficult to determine the relationship between the growth in the volume of business and the growth in the working capital business, yet it may be concluded that for normal rate of expansion in the volume of business, we may have retained profits to provide for more working capital but in fast growing concerns, we shall require larger amount of working capital. 11. EARNING CAPACITY OF BUSINESS- Some firms more earning capacity than others due to quality of their

products, monopoly conditions, etc. such firms with high earning may generate cash profits from operations and contribute to their working capital. The dividend policy of a concern also influences the requirements of its working capital. A firm that maintain a steady high rate of cash dividend irrespective of its generation of profits needs more working capital than the firm that retains larger parts of its profits and does not pay so high rate of cash dividend. 12. PRICE LEVEL CHANGES- Changes in the price also affect the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of working capital, as more funds will be required to maintain the same current assets. The effect of rising prices may be different for different firms. Some firms may be affected much while some others may no be affected at all by the rise in prices. SOURCES FOR THE FINANCING OF WORKING CAPITAL There are various sources of financing of working capital, which are as follows- sources for financing permanent or fixed working capital - sources for financing temporary or variable working capital SOURCES FOR FINANCING PERMAMNEBT OR FIXED WORKING CAPITAL 1. SHARES Issue of shares is the main source of long term finance. Shares are issued by joint stock companies to the public. A company divides its capital into units of a definite face value, say of Rs.

10 each or Rs. 100 each. Each unit is called a share. A person holding shares is called a shareholder. CHARACTERISTICS OF SHARES The main characteristics of shares are following: 1. It is a unit of capital of the company. 2. Each share is of a C definite face value. 3. A share certificate is issued to a shareholder indicating the number of shares and the amount. 4. Each share has a distinct number. 5. The face value of a share indicates the interest of a person in the Company and the extent of his liability. Investors are of different habits and temperaments. Some want to take lesser risk and are interested in a regular income. There are others who may take greater risk in anticipation of huge profits in future. In order to tap the savings of different types of people, a company may issue different types of shares. These are: 1. Preference shares, and 2. Equity Shares. PREFERENCE SHARESPreference Shares are the shares which carry preferential rights over the equity shares. These rights are (a) receiving dividends at a fixed rate, (b) getting back the capital in case the company is wound-up. Investment in these shares are safe, and a preference shareholder also gets dividend regularly. EQIUTY SHARE -

Equity shares are shares which do not enjoy any preferential right in the matter of payment of dividend or reppayment of capital. The equity shareholder gets dividend only after the payment of dividends to the preference shares. There is no fixed rate of dividend for equity shareholders. The rate of dividend depends upon the surplus profits. In case of winding up of a company, the equity share capital is refunded only after refunding the preference share capital. Equity shareholders have the right to take part in the management of the company. However, equity shares also carry more risk. Following are the merits and demerits of equity shares: - To the shareholders: 1. In case there are good profits, the company pays dividend to the equity shareholders at a higher rate. 2. The value of equity shares goes up in the stock market with the increase in profits of the concern. 3. Equity shares can be easily sold in the stock market. 4. Equity shareholders have greater say in the management of a company as they are conferred voting rights by the Articles of Association. - To the Management: 1. A company can raise fixed capital by issuing equity shares without creating any charge on its fixed assets. 2. The capital raised by issuing equity shares is not required to be paid back during the life time of the company. It will be paid back only if the company is wound up.

3. There is no liability on the company regarding payment of dividend on equity shares. The company may declare dividend only if there are enough profits. 4. If a company raises more capital by issuing equity shares, it leads to greater confidence among the investors and creditors. Demerits : - To the shareholders 1. Uncertainly about payment of dividend: Equity share-holders get dividend only when the company is earning sufficient profits and the Board of Directors declare dividend. 2. Speculative: Often there is speculation on the prices of equity shares. This is particularly so in times of boom when dividend paid by the companies is high. 3. Danger of overcapitalisation: In case the management miscalculates the long term financial requirements, it may raise more funds than required by issuing shares. This may amount to over-capitalization which in turn leads to low value of shares in the stock market. 4. Ownership in name only : Holding of equity shares in a company makes the holder one of the owners of the company. Such shareholders enjoy voting rights. They manage and control the company. But

then it is all in theory. In practice, a handful of persons control the votes and manage the company. Moreover, the decision to declare dividend rests with the Board of Directors. 5. Higher Risk : Equity shareholders bear a very high degree of risk. In case of losses they do not get dividend. In case of winding up of a company, they are the very last to get refund of the money invested. Equity shares actually swim and sink with the company. -To the Management 1. No trading on equity : Trading on equity means ability of a company to raise funds through preference shares, debentures and bank loans etc. On such funds the company has to pay at a fixed rate. This enables equity shareholders to enjoy a higher rate of return when profits are large. The major part of the profit earned is paid to the equity shareholders because borrowed funds carry only a fixed rate of interest. But if a company has only equity shares and does not have either preference shares, debentures or loans, it cannot have the advantage of trading on equity. 2. Conflict of interests : As the equity shareholders carry voting rights, groups are formed to corner the votes and grab the control of the ompany. There develops conflict of interests which is harmful for the smooth functioning of a company.

2. DEBENTURESWhenever a company wants to borrow a large amount of fund for a long but fixed period, it can borrow from the general public by issuing loan certificates called Debentures. The total amount to be borrowed is divided into units of fixed amount say of Rs.100 each. These units are called Debentures. These are offered to the public to subscribe in the same manner as is done in the case of shares. A debenture is issued under the common seal of the company. It is a written acknowledgement of money borrowed. It specifies the terms and conditions, such as rate of interest, time repayment, security offered, etc. Characteristics of Debentur Following are the characteristics of Debentures: i) Debenture holders are the creditors of the company. They are entitled to periodic payment of interest at a fixed rate. i i ) Debentures are repayable after a fixed period of time, say five years or seven years as per agreed terms. iii) Debenture holders do not carry voting rights. iv) Ordinarily, debentures are secured. In case the company fails to pay interest on debentures or repay the principal amount, the debenture holders can recover it from the sale of the assets of the company. TYPES OF DEBENTURESDebentures may be classified as: a) Redeemable Debentures and Irredeemable Debentures

b) Convertible Debentures and Non-convertible Debentures. Redeemable Debentures : These are debentures repayable on a pre-determined date or at any time prior to their maturity, provided the company so desires and gives a notice to that effect. Irredeemable Debentures : These are also called perpetual debentures. A company is not bound to repay the amount during its life time. If the issuing company fails to pay the interest, it has to redeem such debentures. Convertible Debentures : The holders of these debentures are given the option to convert their debentures into equity shares at a time and in a ratio as decided by the company. Non-convertible Debentures: These debentures cannot be converted into shares. MERITS OF DEBENTURS Following are some of the advantages of debentures: 1) Raising funds without allowing control over the company: Debenture holders have no right either to vote or take part in the management of the company.

2) Reliable source of long term finance : Since debentures are ordinarily issued for a fixed period, the company can make the best use of the money. It helps long term planning. 3) Tax Benefits : Interest paid on debentures is treated as an expense and is charged to the profits of the company. The company thus saves income tax . 4) Investors Safety : Debentures are mostly secured. On winding up of the company, they are repayable before any payment is made to the shareholders. Interest on debentures is payable irrespective of profit or loss. 3. RETAINED EARNING Like an individual, companies also set aside a part of their profits to meet future requirements of capital. Companies keep these savings in various accounts such as General Reserve, Debenture Redemption Reserve and Dividend Equalization Reserve etc. These reserves can be used to meet long term financial requirements. The portion of the profits which is not distributed among the shareholders but is retained and is used in business is called retained earnings or ploughing back of profits. As per Indian Companies Act., companies are required to transfer a part of their profits in reserves. The amount so kept in reserve may be used to buy fixed assets. This is called internal financing. MERITS Following are the benefits of retained earnings: 1. Cheap Source of Capital :

No expenses are incurred when capital is available from this source. There is no obligation on the part of the company either to pay interest or pay back the money. It can safely be used for expansion and modernization of business. 2. Financial stability : A company which has enough reserves can face ups and downs in business. Such companies can continue with their business even in depression, thus building up its goodwill. 3. Benefits to the shareholders: Shareholders may get dividend out of reserves even if the company does not earn enough profit. Due to reserves, there is capital appreciation, i.e. the value of shares go up in the share market . Following are the limitations of Retained Earnings: 1. Huge Profit : This method of financing is possible only when there are huge profits and that too for many years. 2. Dissatisfaction among shareholders : When funds accumulate in reserves, bonus shares are issued to the shareholders to capitalize such funds. Hence the company has to pay more dividends. By retained earnings the real capital does not increase while the liability increases. In case bonus shares are not issued, it may create a situation of under capitalisation because the rate of dividend will be much higher as compared to other companies. 3. Fear of monopoly : Through ploughing back of profits, companies increase their

financial strength. Companies may throw out their competitors from the market and monopolize their position. 4. Mis-management of funds : Capital accumulated through retained earnings encourage management to spend carelessly. 4. PUBLIC DEPOSITIt is a very old source of finance in India. When modern banks were not there, people used to deposit their savings with business concerns of good repute. Even today it is a very popular and convenient method of raising medium term finance. The period for which business undertakings accept public deposits ranges between six months to three years. Procedure to raise funds through public deposits: An undertaking which wants to raise funds through public deposits advertises in the newspaper . T h e advertisement highlights the achievements and future prospects of the undertaking and invites the investors to deposit their savings with it. It declares the rate of interest which may vary depending upon the period for which money is deposited. It also declares the time and mode of payment of interest and the repayment of deposits. A depositor may get his money back before the date of repayment of deposits for which he will have to give notice in advance. FEATURES : 1. These deposits are not secured. 2. They are available for a period ranging between 6 months and 3 years. 3. They carry fixed rate of interest.

4. They do not require complicated legal formalities as are required in the case of shares or debentures. Keeping in view the malpractices of certain companies, such as not paying interest for years together and not refunding the money, the Government has framed certain rules and regulations regarding inviting public to deposit their savings and accepting them. RULES GOVERNING PUBLIC DEPOSITS : Following are the main rules governing public deposits: 1. Deposits should not be made for less than six months or more than three years. 2. Public is invited to deposit their savings through an advertisement in the press. This advertisement should contain all relevant information about the company. 3. Maximum rate of interest is fixed by the Reserve Bank of India. 4. Maximum rate of brokerage is also fixed by the Reserve Bank of India. 5. The amount of deposit should not exceed 25% of the paid up capital and general reserves. 6. The company is required to maintain Register of Depositors containing all particulars as to public deposits. 7. In case the interest payable to any depositor exceeds Rs. 10,000 p.a., the company is required to deduct income-tax at source. ADVANTAGES : Following are the advantages of public deposits:

1. Simple and easy: The method of borrowing money through public deposit is very simple. It does not require many legal formalities. It has to be advertised in the newspapers and a receipt is to be issued. 2. No charge on assets : Public deposits are not secured. They do not have any charge on the fixed assets of the company. 3. Economical : Expenses incurred on borrowing through public deposits is much less than expenses of other sources like shares and debentures. 4. Flexibility : Public deposits bring flexibility in the structure of the capital of the company. These can be raised when needed and refunded when not required.

Following are the disadvantages of public deposits: 1. Uncertainty : A concern should be of high repute and have a high credit rating to attract public to deposit their savings. There may be sudden48 :: Business Studies withdrawals of deposits which may create financial problems. 2. Insecurity : Public deposits do not have any charge on the assets of the concern. It may not always be safe to deposit savings with companies particularly those which are not very sound.

3. Lack of attraction for professional investors : As the rate of return is low and there is no capital appreciation, the professional investors do not appreciate this mode of investment. 3 4. Uneconomical : The rate of interest paid on public deposits may be low but then there are other expenses like commission and brokerage which make it uneconomical. 5. Hindrance to growth of capital-market : If more and more money is deposited with the companies in this form there will be less investment in securities. Hence the capital market will not grow. This will deprive both the companies and the investors of the benefits of good securities. 6. Overcapitalization : As it is an easy, convenient and cheaper source of raising money, companies may raise more money than is required. In that case it may not be able to make the best use of the funds or may indulge in speculative activities. 5. BORROWING FROM COMMOWING FROM BANKS : Traditionally, commercial banks in India do not grant long term loans. They grant loans only for short period not extending one year. But recently they have started giving loans for a long period. Commercial banks give term loans i.e. for more than one year. The period of repayment of short term loan is extended at intervals and in some cases loan is given directly for a long period. Commercial banks provide long term finance to small scale units in the priority sector. MERITS OF LONG TERM BORROWINGS FROM COMMERCIAL BANKS :

The merits of long-term borrowing from banks are as follows: 1. It is a flexible source of finance as loans can be repaid when the need is met. 2. Finance is available for a definite period, hence it is not a permanent burden. 3. Banks keep the financial operations of their clients secret. 4. Less time and cost is involved as compared to issue of shares, debentures etc. 5. Banks do not interfere in the internal affairs of the borrowing concern, hence the management retains the control of the company. 6. Loans can be paid-back in easy instilments. 7. In case of small-scale industries and industries in villages and backward areas, the interest charged is low. DEMERITS: Following are the demerits of borrowing from commercial banks: 1. Banks require personal guarantee or pledge of assets and business cannot raise further loans on these assets. 2. In case the short term loans are extended again and again, there is always uncertainty about this continuity. 3. Too many formalities are to be fulfilled for getting term loans from banks. These formalities make the borrowings from banks time consuming and inconvenient.