DEBENTURES A debenture is a legal document containing an acknowledgment of indebtedness by a company.

It attains a promise to pay a stated rate of interest for a definite period and then to repay-the principal at a given rate of maturity. Def: According to companies Act1956, Debenture includes debenture stock, bonds and any other securities of company, whether constituting a charge on the asset or not. Characteristic features of Debentures: a) It is given in the form of certificate of indebtedness by the company specifying the date of redemption and interest rate. b) The rate of interest is fixed at the time of issue itself which is known as Coupon rate of interest. Interest is paid as a percentage of the par value of the debenture and may be paid annually, semi- annually or quarterly. The company has the legal binding to pay the interest rate. c) Redemption date: it would be specified in the issue. The maturity period may range for 5 to 10 years in India, they may be redeemed installments. Redemption is done through a creation of sinking fund by the company. d) Indenture: it is trust deed between the company issuing debentures and the debenture trustee who represents the debenture holders. The trustee takes the responsibility of protecting the interest of the debenture holders and ensures the company fulfills the contractual obligation. FIs, Banks, and Insurance companies, or firm attorneys act as trustees to the investors. In the Indenture, the terms of the agreement, description of debentures, rights of the debenture holder, rights of the issuing company and the responsibilities blithe company are specified clearly. Types of Debentures: Debentures are classified on the basis of the, security and convertibility., a) Secured or Unsecured, b) Fully convertible or Partially convertible debentures. c) Zero-coupon debentures d) Cumulative convertible debentures. Advantages (to investor) a) It earns a stable rate of return; b) It enjoys a high order of priority in the event of liquidation.

c) It is protected by various provisions of the debenture trust deed. d) It generally has a fixed maturity period Disadvantage s-(to investor) a) b) c). The interest on debentures is fully taxable. Debenture prices are vulnerable to increase in interest rates, Debentures do not carry the right to vote.

Advantages to the Issuing company: a) The specific cost of debt capital is much lower than the cost of preference or equity capital. This is , because the interest on debentures is tax deductible and hence the effective cost of debentures is much less. b) Debenture financing does not result in dilution of control since debenture holders are not entitled to vote.. c) The call provision found in many debenture issues provides flexibility in changing the capital structure; d) The fixed monetary burden associated with debenture financing, irrespective to changes in price level has appeal to many companies. Disadvantage to company a) Debenture interest and capital repayment are obligatory payments. Failure to meet the payments Jeopardize the solvency of the firm, b) The protection covenants associated with a debenture issue may be restrictive. c) It enhances the financial risk associated with the firm.

7) Generally, debentures are issued by the private sector companies as a long, term promissory note for raising loan capital. Bond is an alternative form of debenture in India. Public sector companies and FIs issue bonds

INTRODUCTION TO DERIVATIVES
Derivatives are defined as financial instruments whose value derived from the prices of one or more other assets such as equity securities, fixed-income securities, foreign currencies, or commodities.

Derivatives are also a kind of contract between two counterparties to exchange payments linked to the prices of underlying assets. Derivative can also be defined as a financial instrument that does not constitute ownership, but a promise to convey ownership. Examples are options and futures. The simplest example is a call option on a stock. In the case of a call option, the risk is that the person who writes the call (sells it and assumes the risk) may not be in business to live up to their promise when the time comes. In standardized options sold through the Options Clearing House, there are supposed to be sufficient safeguards for the small investor against this. The most common types of derivatives that ordinary investors are likely to come across are futures, options, warrants and convertible bonds. Beyond this, the derivatives range is only limited by the imagination of investment banks. It is likely that any person who has funds invested an insurance policy or a pension fund that they are investing in, and exposed to, derivatives-wittingly or

unwittingly. UNDERSTANDING DERIVATIVES The primary objectives of any investor are to maximize returns and minimize risks. Derivatives are contracts that originated from the need to minimize risk. The word derivative originates from mathematics and refers to a variable, which has been derived from another variable. Derivatives are so called because they have no value of their own. They derive their value from the value of some other asset, which is known as the underlying. For example, a derivative of the shares of Infosys (underlying), will derive its value from the share price (value) of Infosys. Similarly, a derivative contract on soybean depends on the price of soybean. Derivatives are specialized contracts which signify an agreement or an option to buy or sell the underlying asset of the derivate up to a certain time in the future at a prearranged price, the exercise price. The contract also has a fixed expiry period mostly in the range of 3 to 12 months from the date of commencement of the contract. The value of the contract depends on the expiry period and also on the price of the underlying asset. For example, a farmer fears that the price of soybean (underlying), when his crop is ready for delivery will be

lower than his cost of production. Lets say the cost of production is Rs 8,000 per ton. In order to overcome this uncertainty in the selling price of his crop, he enters into a contract (derivative) with a merchant, who agrees to buy the crop at a certain price (exercise price), when the crop is ready in three months time (expiry period). In this case, say the merchant agrees to buy the crop at Rs 9,000 per ton. Now, the value of this derivative contract will increase as the price of soybean decreases and vice-a-versa. If the selling price of soybean goes down to Rs 7,000 per ton, the derivative contract will be more valuable for the farmer, and if the price of soybean goes down to Rs 6,000, the contract becomes even more valuable. This is because the farmer can sell the soybean he has produced at Rs .9000 per tonne even though the market price is much less. Thus, the value of the derivative is dependent on the value of the underlying. If the underlying asset of the derivative contract is coffee, wheat, pepper, cotton, gold, silver, precious stone or for that matter even weather, then the derivative is known as a commodity derivative. If the underlying is a financial asset like debt instruments, currency, share price index, equity shares, etc, the derivative is known as a financial derivative. Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called exchange-traded derivatives. Or they can be customized as per the needs of the user by negotiating with the other party involved. Such derivatives are called over-the-counter (OTC) derivatives. Continuing with the example of the farmer above, if he thinks that the total production from his land will be around 150 quintals, he can either go to a food merchant and enter into a derivatives contract to sell 150 quintals of soybean in three months time at Rs 9,000 per ton. Or the farmer can go to a commodities exchange, like the National Commodity and Derivatives Exchange Limited, and buy a standard contract on soybean. The standard contract on soybean has a size of 100 quintals. So the farmer will be left with 50 quintals of soybean uncovered for price fluctuations. However, exchange traded derivatives have some advantages like low transaction costs and no risk of default by the other party, which may exceed the cost associated with leaving a part of the production uncovered. TYPES OF DERIVATIVES:

There are mainly four types of derivatives i.e. Forwards, Futures, Options and swaps.The most commonly used derivatives contracts are Forward, Futures and Options. Here some derivatives contracts that have come to be used are covered.

FORWARD:- A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price.. Forwards are contracts customizable in terms of contract size, expiry date and price, as per the needs of the user. FUTURES:- As the name suggests, futures are derivative contracts that give the holder the opportunity to buy or sell the underlying at a pre-specified price some time in the future. They come in standardized form with fixed expiry time, contract size and price. A futures contact is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. For example:- A, on 1 Aug. agrees to sell 600 shares of Reliance Ind. Ltd. @ Rs. 450 to B on 1st sep. FEATURE Operational Mechanism FORWARD CONTRACT Traded directly between two parties (not traded on the exchanges). Differ from trade to trade. Exists. FUTURE CONTRACT Traded on the exchanges.

Contract Specifications Counter-party risk

Liquidation Profile

Price discovery

Examples

Contracts are standardized contracts. Exists. However, assumed by the clearing corp., which becomes the counter party to all the trades or unconditionally guarantees their settlement. Low, as contracts are tailor High, as contracts are standardized exchange made contracts catering to the traded contracts. needs of the needs of the parties. Not efficient, as markets are Efficient, as markets are centralized and all scattered. buyers and sellers come to a common platform to discover the price. Currency market in India. Commodities, futures, Index Futures and Individual stock Futures in India.

OPTIONS:- Options are a right available to the buyer of the same, to purchase or sell an asset, without any obligation. It means that the buyer of the option can exercise his option but is not bound to do so. Options are of 2 types: calls and puts. CALLS:- Call gives the buyer the right, but not the obligation, to buy a given quantity of the underlying asset, at a given price, on or before a given future date. Example: - A, on 1st Aug. buys an option to buy 600 shares of Reliance Ind. Ltd. @ Rs 450 on or before 1st Sep. In this case, A has the right to buy the shares on or before the specified date, but he is not bound to buy the shares. PUTS:- Put gives the buyer the right, but not the obligation, to sell a given quantity of the underlying asset, at a given price, on or before a given date. For example:- A, on 1st Aug. buys

an option to sell 600 shares of Reliance Ind. Ltd. @ Rs 450 on or before 1st Sep. In this case, A has the right to sell the shares on or before the specified date, but he is not bound to sell the shares. In both the types of the options, the seller of the option has an obligation but not a right to buy or sell an asset. His buying or selling of an asset depends upon the action of buyer of the option. His position in both the type of option is exactly the reverse of that of a buyer. Particulars Call OptionsPut Options If you expect a fall in price(Bearish)Short Long If you expect a rise in price(Bullish) Long Short WARRANTS:- Options generally have lives of up to one year, the majority of options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS:- The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. BASKET:- Basket options are options on portfolios of underlying assets are usually a moving average of a basket of assets. Equity index options are a form of basket options. SWAPS:- Swaps are private agreement between two parties to exchange cash flows in the future according to a pre arranged formula. They can be regarded as portfolios of forward contract. The two commonly used swaps are INTEREST RATE SWAPS:- These entail swapping only the interest related cash flows between the parties in the same currency. CURRENCY SWAPS:- These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. SWAPTIONS:- Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus, a swaptions is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaptions is an option to receive fixed and pay floating. A payer swaptions is an option to pay fixed and receive floating. Out of the above mentioned types of derivatives forward, future and options are the most commonly used.

WORKING CAPITAL MANAGEMENT INTRODUCTION The term working capital implies a companys investment in short term assets, cash, short term securities, accounts receivables and inventories. Precisely, these assets are financed by short-term liabilities, thus net working capital is current assets less current liabilities. Working capital management is the decision relating to working capital and short term financing, and this includes managing the relationship between the companys short-term assets and its short-term liabilities. This enables the company to continue operations and to have enough cash flow at its disposal to satisfy both maturing short-term debt and upcoming operational expenses, which is the major objective of working capital management. NATURE OF WORKING CAPITAL Working capital management is centered on problems arising in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them. As explained earlier, the term current assets refer to those assets which business will be converting into cash within one year without experiencing a dwindling in value and upsetting the operations of the company. Most major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are referred to those liabilities that are intended at the beginning, payable in the ordinary course of business, within a year, out of the current assets or earnings of the concern. Among the essential current liabilities are accounts payable, bills payable, bank overdraft, and outstanding expenses. The Principal objective of working capital management is to manage the companys current assets and liabilities in such a way that a satisfactory level of working capital is maintained. It is so due to the fact that if the company cannot sustain an acceptable level of working capital, it is certainly may lead into what is termed insolvency and may end up into bankruptcy. Current assets must be large as much as necessary to be able to cover its current liabilities to guarantee a reasonable margin of safety. All of the current assets are to be managed efficiently so as to maintain the liquidity of the company; while not keeping too high a level of any one of them. Every of the short-term bases of financing must be managed continuously to guarantee the possible best way usage. Hence, the interaction between current assets and current liabilities is the main premise of the theory of working management. The central elements of the theory of working capital management includes its definition, need, optimum level of current assets, the trade-off between profitability and risk which is associated with the level of current assets and liabilities. In addition to financing mix strategies and so on. Concepts and Definitions of Working Capital The two concepts of working capital are gross and net. The term gross working capital is also known as working capital, implying the total current assets. The term net working capital can be

defined in two ways: The most common definition of net working capital (NWC) is the difference between current assets and current liabilities. Alternate definition of NWC is that portion of current assets which is financed with long-term funds. Most task of the financial manager in managing working capital proficiently is to guarantee adequate liquidity in the operation of the company. The liquidity of business enterprise is determined by its ability to satisfy short-term obligations as they become due. Three basic measures of companys overall liquidity are:

The current ratio, The acid-test ratio, and The net working capital.

Net working capital (NWC) as a measure of liquidity is not very useful for comparing the performance of different companies, but it is quite of liquidity that is not really essential for comparing the performance of various companies, but it is very helpful for internal control. The NWC contributes enormously while comparing the liquidity of the same company over time. For the main reason of working capital management, therefore NWC is expected to measure the liquidity of the company. Meanwhile, the focus of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of NWC is sustained. The common Definition of NWC and its Implications NWC is commonly defined as the difference between current assets and current liabilities. Efficient working capital management requires that company should operate with some amount of NWC, the exact amount varying from firm to firm and depending, among other things, on the nature of industry. The theoretical justification for the use of NWC to measure liquidity is based on the premise that the greater the margin by which the current assets cover the short-term obligations, the more is the ability to pay obligations when they become due for payment. The NWC is necessary because the cash outflows and inflows do not coincide. In other words, it is the non synchronous nature of cash flows that makes NWC necessary. In general, the cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflows are however difficult to predict. The more predictable the cash inflows are, the less NWC will be required. A company like electricity generation company, with almost certain and predictable cash inflows can operate with little or no NWC. But where cash inflows are uncertain, it will be necessary to maintain current assets at a level adequate to cover current liabilities, that is there must be NWC . Alternative Definition of NWC NWC can alternatively be defined as that part of the current assets which are financed with longterm funds. Since current represent sources of short-term funds, as long as current assets exceed

the current liabilities, the excess must be financed with long-term funds. This alternative definition, as shown subsequently, is more useful for the analysis of the trade-off .between profitability and risk. POLICY OF WORKING CAPITAL The policy of working capital in accordance to Weston et al position is concerned with two sets of relationship among balance sheet items. Firstly, the policy question about the degree of total current assets to be held. Though current assets vary with sales, it should be noted that the ratio of current assets to sales becomes a policy issue. A company may hold relatively little proportion of stocks of current assets if it elects to operate aggressively. Such move is to lower the required level of investment and enhance the expected rate of return on investment. Thus, due to excessive tough credit policy, such aggressive policy may as well enlarge the possibility of running out of inventories and cash or sales loss. The connection/relationship between types of assets and means such assets are financed is the second policy question. One policy requests for harmonizing asset and liability maturities: financing short term assets with short term debt, and long term assets with long term debt or equity. If such policy is implemented, the maturity formation of debt is resolved by considering fixed versus current assets. Meanwhile, short-term debt is often less expensive to long term debt. This implies that the expected rate of return may be more if short term debt is employed. By offsetting the return advantage shows that huge proportion of short term credit amplifies the risks as follows: First, having to renew this debt at much higher interest rates Second, not being able to renew the debt at all whenever the company goes through tough times. Both areas of working capital policies entail risk/return tradeoffs. Therefore, the need to work-out a modality to establish the best possible levels of each type of current assets to hold, and the substitute methods to finance them is necessary. The procedure of accomplishing these optimal conditions is what may be termed as working capital management. As pointed out by Shin and Soenen (1998) that Wal-Mart and K-Mart had comparable capital formations in 1994, but K-Marts poor management of working capital contributed to its going bankrupt. This is because K-Mart had a cash conversion cycle of about 61 days whereas WalMart had a shorter conversion cycle of 40 days instead. K-Mart was with faced an extra $193.3 million per year financing costs arising from long-term conversion cycle. As pointed out in their 2005 U.S. survey report, there is a high positive correlation between the efficiency of a corporations working capital policies and its return on invested capital. Hence, Nunn (1981) employs the PIMS database to study the reason for some product lines having small working capital requirements, whereas some product lines are having large working capital requirements. Moreover, Nunn has much interest in permanent rather than temporary working capital investment since he employed data averaged over four years. By employing

factor analysis, hes able to identify factors connected with the production, sales, competitive position and industry. While highlighting the function of industry practices on firm practices, Hawawini, Viallet, and Vora (1986) observe the influence of a companys industry on its working capital management. They resolved that there is a greater industry consequence on company working capital management practices which is stable over time; having used data on 1,181 U.S companies over the period 1960 to 1979. Their studies arrived at the conclusion that sales growth and industry practices are essential issues that influence companys investment in working capital. The review above depicts that there are models to illustrate the way working capital refers to a companys investment in short term assets-cash, short-term securities, accounts receivable, and inventories . Though, these assets are financed by short- term liabilities. Thus, net working capital is current assets less current liabilities. Van Home (1986) submitted that working capital management is a misnomer; if the working capital of the company is not managed. The term he stressed describes a set of management decisions that affect specific types of current assets and current liabilities. In turn, those decisions should be rooted in the overall valuation of the company. This submission does not disagree with the substance of the postulations of Weston et al. Thus, it strengthens their arguments that the idea of working capital management must do with those management decisions which border on balancing of risk/return tradeoffs for current asset holdings and the liabilities that create those assets. Weston et al then advised that working capital should be considered as an investment no less important that equipment and materials. They both argued that current assets embody more than half the total assets of a business, and since the investment is relatively volatile, it is worthy of careful consideration. They argued that it is even more so for the small business. The small business may lower its investment in fixed assets by renting or leasing plant and equipment, but there is no way it can avoid an investment in cash, inventories and receivables. Further, since small and medium companies have relatively limited access to the long-term capital markets, it must necessarily rely heavily on trade credit and short- term bank loans, both of which affect net working capital by increasing current liabilities. Approaches determining financing mix: The most importance decisions, involved in the management of working capital is how current assets will be financed. There are, broadly speaking, two sources from which funds can be raised for current asset financing. 1) Short term sources (Current Liabilities), and

2) Long term sources, such as share capital, long term borrowings, internally generated resources like retained earnings and so on. There are three basic approaches to determine an appropriate financing mix: a) Hedging approach, also called matching approach. b) Conservative approach. c) Trade off between these two. Hedging approach; According to this approach, the maturity of the sources funds should match the nature of the assets to be financed. For the purpose of analysis, the current assets can be broadly classified into two classes: 1. Those which are required in a certain amount for a given level of operation and hence, do not very over time. 2. Those which fluctuate over time. The hedging approach suggests that long term fund should be used to finance the fixed portion of current assets requirements. The purely temporary requirements this is, the seasonal variations, over and above the permanent financing needs should be appropriately financed with short term funds (current liabilities). Conservative approach: This approach suggests that the estimated requirement of total funds should be from long term sources; the use of short term funds should be restricted to only situations are when there is an unexpected out flow of funds. Trade off between the hedging and conservative approaches: The third approach tradeoff between the two approaches strikes a balance and provides a financing plan that lies between two extremes. The exact trade off between risk and profitability will differ from case to case depending no risk perception of the decision makers. One possible trade off could be assumed to be equal to the average of the minimum and maximum monthly requirement of funds may be financed rough long run sources and for any additional financing need, short term funds may be used. Concept of net working capital: The concept of net working capital.

a) It indicates the liquidity position of the firm. b) It suggests the extent to which working capital needs may be financed by permanent source of funds. c) It indicated the firms ability to meet its operating expenses and short -term liabilities. d) It indicates the measure of protection available to the short term creditors. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. Net working capital concept also covers the question of judicious mix of long term funds for financing current assets. For every firm there is a minimum amount of net working capital, which is permanent. The goal of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of NWC is maintained. Types of working capital: On the basis of periodicity requirements working capital can be classified into two types. 1. Fixed or permanent working capital 2. Variable or Temporary working capital. Fixed or permanent working capital: It refers to the minimum level of current assets, which is continuously required by the firm to carry on its business operations. This investment is current assets are of the permanent nature and will increase as the size of business expands. The permanent or fixed working capital consists regular working capital and reverse working capital. Variable or temporary working capital: The extra working capital required for meeting the season demands and some special exigencies. Variable working capital may be of two types. There are: 1. Seasonal Working Capital 2. Special Working Capital WORKING CAPITAL CYCLE In a business cycle, cash flows into, around and out of the business. Cash is life blood of a business, and a managers key mission is to assist in keeping it to flow and to take the advantage

of the cash-flow in making profits. A business that is operating profitably, in theory is generating cash surpluses. If it does not generate surpluses, then the business ultimately will run out of cash and expire. The more speedily the business gets bigger the further cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Better management of working capital generates cash, and will assist in improving profits and lessen risks. Hence, it is imperative to note that the cost of offering credit to customers and holding stocks may signify a significant percentage of a companys total profits. There are two elements in a business cycle that absorb cash, these are -receivables (debtors that owe you money) and inventory (stocks and work-in-progress). Major sources of cash are Payables (payment from your creditors), and Equity and Loans

Working Capital Cycle: Source from JPMorgan (2003) Fleming International Cash Management Survey in conjunction with the ACT Every component of working capital, such as inventory, receivables and payables has two dimensions, which are TIME and MONEY. To manage working capital entails both time and money. A business will spawn more cash or will need to borrow less money to finance working capital if possible to get money to move faster around the cycle, i.e. getting monies due from debtors as fast as possible or lowering the sum of monies tied-up by lowering inventory levels relative to sales. As a consequence, one can lower bank interest cost or one will have extra free money that will be available to enhance more sales growth or investment. In the same way, negotiating improved terms with suppliers such as getting longer credit or an increased credit limit will effectively create free finance to assist funding future sales. Working capital is referred to as the fuel powering global business activities, but often a greater percentage of this fuel is constantly stuck in the pump; tied up in aging invoices and lengthy

Days Sales Outstanding (DSO) cycles. Those firms that are looking to enhance cash flow have primarily focused on collections. Whereas traditionally, collections have always been a reactive process i.e. picking up on aging invoices after they are already late in payment, and then resolving the underlying issues in an effort to collect. Since it is not easy to go up-stream and systematically uncover and resolve the root causes of issues that actually drive the delayed payments. Hence, most of the collections efforts normally end up squarely emphasizing on dealing with symptoms, rather than addressing the real issues. As a result of process automation built around innovative dispute prevention technologies, it is now possible to take a more proactive approach to collections that are proving to yield enormous dividends that include the unlocking of millions in working capital, elimination of revenue leakage, and radical improvements in overall customer satisfaction. Many companies have already seen significant returns from their work in this area. As submitted by JP Morgan (2005); to optimize working capital globally, payment and information components of a transaction must be integrated. Determinations of working capital There are no set rules or formula to determine the working capital requirements of the firms. The working capital requirement of a depend on a number of factors. A firm always wants to strike a balance between. Profitability and liquidity of the working capital funds. The various factors determining the working capital requirements of a firm can be classified into two groups: 1. Internal Factors 2. External Factors INTERNAL FACTORS: These are the factors, which are well within the control of the manage. Such factors include the following: 1. Nature of business:

The level of working capital varies among various types of business undertakings. For instance, concerns, engaged in rendering public utility service require little amount of working capital but abundant amount of fixed capital. Contrary to this, trading concerns require more working capital and less amount of fixed capital. The amount of working required by industrial units varies according to their scale of operations. 2. Size of Business:

A small firm may require more amount of working capital because of small cash inflows and also because of small cash inflows and also because of frequent defaults committed by the customers. As against this, large firms having adequate and continuous flow of funds may require only less working capital. 3. Production Policy of Firm:

The production policy of firm is an importance factor to decide the working capital requirement of a firm. Seasonally, if production has a decisive impact on the requirements of working capital of firms, the working capital requirements vary among manufacturing concerns depending upon the level of inventory required to meet the seasonal demand and the need to maintain a steady rate of production. Hence, firm having uniform production policy will require more amount of working capital than that or manufacturing concerns with varying production plans. We just noted that a strategy of constant production might be maintained in order to resolve the working capital in the demand for the firms product. A steady production policy will cause inventories to accumulate during the off season periods and the firm will be exposed to great inventory costs and risks. Thus, if costs and risks of maintaining a constant production schedules in accordance with changing demand. Those firms, whose production capacities can be utilized for manufacturing, carried products, can have the advantage of diversified activities and solve their working capital problems. They will manufacture the original product line during its increasing demand and when it has an off season; other production policies will differ from to firm, depending on circumstances of individual firm. 4. Firms Credit Policy: The level of working capital is also determined by the credit policy by the firm that is, the policy concerning purchase and sales. The credit policy influences the working capital requirements in the following two ways. A) Through the credit terms granted by the firms to its customers. B) Credit terms available to the firm from its creditors. 5. Dividend Policy: There is a well established relationship between dividends and working capital in firms where conservative dividend policy is followed. A firm following conservative divided policy will have more earnings that could be ploughed back into business. This gives an adequate working capital for the firm. As against this, a firm following a liberal dividend policy may require more working capital because such a policy reduces the profits available for retention in the business. 6.Available of Credit: The working capital requirements of a firm are also affected by credit terms granted by its creditors. A firm will need less working capital it liberal credit terms are available.

1. Seasonal variations: Strong seasonal movements create certain special problems of working capital in controlling the internal financial savings. EXTERNAL FACTORS The following are the various external factors, which determine the quantum of working capital required by a firm. a) Business Fluctuations: Most firms, experience fluctuations in demand for their products & services. These business variations affect the working capital requirements. When there is an upward saving in the economy, sales will increase correspondingly, the firms investment in inventories and book debts will also increase capacity. This act of firm will require additional funds of working capital. On the other hand, when there is a decline in economy, sales will come down and consequently the levels of inventory and book debts will also fall. Under necessary condition, the firm tries to reduce the short term borrowing. b) Technology Changes and Developments: The technological changes and developments is the area of production can have immediate effects on the need for working capital. If the manufacturing process user of the latest technological advancement there may be increase in the scale of production and distribution, which may require maintenance of huge working capital. c) Infrastructure Facilities: The firm may require additional funds to maintain the levels of inventory and other current assets, when there are good infrastructure facilities in the country like transportation and communication. d) Import Policy: The policies of the Government have a direct hearing on the quantum of working capital required for a firm. For instance, if the import duties are heavy, the cost of goods, which are imported, will in turn, necessitate the holding of more working capital. e) Taxation Policy: The tax policy of the Government will influence the working capital decisions. The Government follows regressive taxation policy i.e., imposing heavy tax burdens on business firms; they are if with very little profits for distribution and retention purpose. Consequently the firm has to borrow additional funds to meet their increased working capital needs. When there is a liberalized tax policy, the pressure on working capital requirement is minimized.^