EXECUTIVE SUMMARY

Hillary emerged as INDIA’S largest manufacturer of fabrics-worsted, polyester &

silk furnishing. & silk furnishing. Sixteen years after the advent of economic
liberalization June 1991, India is now clearly moving along a high growth path. BSL
Ltd. is more consolidated and technologically modern operations, to further leverage
the goodwill that its product enjoys in domestic and global markets.

Summer training is by the most important & interesting part of MBA (Second Sem.)
every student is required to go to under the training in a leading business
organization on a project in the functional area of his/her choice.

The duration of this training is 8-10 weeks. The rational behind this summer training
is to expose management student to corporate culture so that they may broaden their
outlook & get an insight as to how the theoretical knowledge which they have
gained at there institution is applied in business situation.

I was extremely lucky to be selected one of the premier organization in the country
BSL LTD , Hillary for a 2 months being thoroughly managed organization was had
a good opportunity to put over theoretical knowledge in practices.

During our 2 months in the company, I worked on the project “working capital
financing & management” for BSL Ltd.

These 2 months constituted one of the most interesting & rewarding period of my
MBA studies.

1
ACKNOWLEDGEMENT
Any work accomplishment is seldom on person achievement. There are usually
many people behind it who contribute to its goodness in form or the other. It was my
good luck that the staff of BSL was supportive which ease my job by quite a long
extent.

For the development of the project. I extend my he artful to MR. PARVEEN JI

JAIN & MR. LAXMAN JI TIKYANI Department of finance for providing
excellent mentoring, encouragement & support.

I sincerely thank ho despite his tight schedule spared time for discussions and gave
basic ground rules and directions, without which completion of this project would
have been impossible.

I am highly grateful to the management of BSL LTd. for giving me the opportunity
to work on this Project, and in the process enrich myself with immense learning on
all aspect, from the study of Working capital, its Management and Financing to the
understanding of the textile Industry as a whole.

I am grateful to all employees of BSL Ltd. For providing me all the information and
help I required for the completion of this project.

Last but not the least; I am grateful to my institute, DEPARTMENT OF

COMMERCE & MANAGEMENT, UNIVERSITY OF KOTA (KOTA) & my
family that provided me this opportunity to interact with this organization and
understand the intricacies o the corporate world.

2
PERFACE
The summer training a management student plays an important role in developing
him as a well-groomed professional. It allows a student to give theoretical concepts a
practical stand in the field of application. It gives the candidate an idea of dynamic
& versatile professional world as well as exposure to the intricacies and complexities
of corporate world.

Doing the summer training at BSL LTD was a great experience. An opening
experience to the concepts of FINANCE, which helped me a lot in understanding the
concept that are applied for in the organization. This organization since its inception
has progressed a lot & is walking on the guidelines of success. As the organization is
marching with the tenacious speed towards the horizon.

During the MBA course we are taught dozen of subjects which if not applied
properly are a simply waste of time. Implementing & learning the concepts of
FINANCE in a work place having large number of professionals provides an
opportunity to groom oneself to changing needs and increase the knowledge.

Cotton In a period of 2 months exposure to the corporate environment, I got a

learning of organizational structure, its protocols, etc.

Real learning places its worth only when it gives sweet fruits in future. Summer
training is one way to learn at work. I enjoyed the interesting experience and every
part of it.

3
ABSTRACTS
BSL LTD is one of the fastest growing Textile Industry in INDIA. Presently it has
plant in operation at Mandpam, Hmeergah.

The title of my project study was “Working Capital Financing & Management”.
Working capital is taken to be the lifeblood of a business. Lack of working capital
may lead a business to “technical insolvency” and ultimately to liquidation. That is
why, the working capital management of a firm is considered to be one of the most
important tasks of financial managers. A decision regarding the volume of current
assets has its own importance no doubt, but the question of financing is, in fact, the
area of working capital management. Since the management is concerned with
proper financial structure and cost of funds, so the funds required for working capital
must be raised judiciously.

The main aim of my project was to analyze the completer process of working capital
financing and study the existing system in the organization and also to suggest
working capital funning required by the company.

The report can be divided into the following parts according to the project
analysis and was handled accordingly:

1. Literature Survey
This section is used to build a theoretical or further study in the project.
The concepts such as, sources of funds, working capital cycle, key ratio
and working capital management are discussed. The optimum level of
working capital and different financing policies are also reviewed.

2. Process of Working capital finance

In this section, various steps involved in the working capital funding from
banks are discussed. The process of getting the working capital financed is
a very comprehensive one, consisting of a number of steps; starting from
assessing the fund requirements to the step of auditing by the bank and the
auditors. The process o estimating the levels of inventory, receivable, other
current assets and liabilities is also discussed. The methods of appraisal,
final sanction and ways of disbursal of funds by the banks are also
included.
4
3. Working capital finance and management at BSL Limited
This portion of the project study aimed at understanding the existing
system of working capital financing at BSL Limited. This included a study
of technique used by company, like term loans & working capital loan &
innovative techniques which can be used for borrowings, like Commercial
Paper, FCNR (B) linked loans. The high credit rating of the company is
also mentioned in this section. Working Capital requirements, it has been
suggested to increase the working Capital borrowing limit in view of the
increased funds requirement due to commissioning of the new plants.

5
TABLE OF CONTENT
1. EXECUTIVE SUMMARY………………………………………………..1
2. ACKNOWLEDGEMENT…………………………………………………2
3. PERFACE………………………………………………………………….3
4. ABSTRACTS………………………………………………………………4
5. TABLE OF CONTENTS………………………………………………….6
6. LIST OF FIGURE…………………………………………………………7
7. 1 INTRODUCTION………………………………………………………8
1.1 INTRODUCTION TO TEXTILE WORLD……………………..8
1.2 RELATED GROUP………………………………………………10
1.3 CORPORATE INFORRMATION………………………………10
1.4 BUSINESS OVERVIEW………………………………………….13
1.5 PRODUCTS WE MANUFACTURE……………………………..14
1.5.1 PRODUCT APPLICATION………………………………14
1.5.2 FOCUS ON GLOBAL MARKET………………………...16
1.6 VISION AND MISSION…………………………………………..18
1.7 FINANCIAL DEPARTMENT……………………………………19
1.8 MANAGERIAL CHALLENGES………………………………….21
2 OBJECTIVES AND SCOPE OF
STUDY……………………………..22
2.1 OBJECTIVE………………………………………………………22
2.2 SCOPE……………………………………………………………..22
3 LITERATURE SURVEY………………………………………………..23
4 CHAPTER 4…………………………………………………………24
CONCEPT OF WORKING CAPITAL……………………………24
4.1 NEEDS FOR WORKING CAPITAL………………………….25
4.2 TYPES OF WORKING CAPITAL……………………………25
4.2.1 PERMANENT WORKING CAPITAL………………………25
4.2.2 TEMPORARY WORKING CAPITAL……………………..26
4.3 ADEQUACY OF WORKING CAPITAL……………………..28
4.4 APPROCHAES FOR DETERMINING THE FINANCING
MIX……………………………………………………………………29
4.5 SOURCES OF FUNDS………………………………………….31
4.6 USES OF FUNDS………………………………………………..32

6
4.7 CHANGES IN WORKING CAPITAL…………………………33
4.8 WORKING CAPITAL CYCLE AND KEY RATIOS………….33
4.9 CALCULATION OF WORKING CAPITAL…………………38
4.10 WORKING CAPITAL MANAGEMENT……………………39
4.11 OPTIMUM LEVEL OF WORKING CAPITAL……………40
4.12 WOKING CAPITAL FINANCING & POLICIES………….42
4.13 TANDON, CHORE, KANNAN AND CERTAIN
OTHER COMMITTEES RECOMMENDATION...............46
4.14 METHODS OF LENDING……………………………..51
4.15 RECENT RBI GUIDELINES REGARDING
WORKING CAPITAL FINANCE…………………………..54

CHAPTER 5………………………………………………………… 47
RESEARCH DESIGN
5.1 GENERAL METHODOLOGY………………………………..47
CHAPTER 6
PROCESS OF WORKING CAPITAL FINANCING……………49
CHAPTER 7 ……………………………………………………….. 52
7.1 ASSESSING WORKING CAPITAL REQUIRREMENT…52
7.2 PREPARING CMA, APPLICATION & OTHER
SUPPORTING DOCUMENTS…………………………………… 55
7.3 APPLICATION TO SINGLE BANK CONSORTIUM OF
BANKS………………………………………………………………..57
7.4 APPRAISAL BY SINGLE BANK/LEAD BANK…………….57
7.5 SANCTION BY SINGLE BANK /MEMBER BANKS OF
CONSORTIUM……………………………………………………… 59
7.6 AGREEMENT & CREATION OF SECURITY………………59
8. WORKING CAPITAL EQUIEMENT AT BSL LIMITED……73
9 .1 A SWOT ANALYSIS IS THE KEY TO A SUCESSFUL
INDUSTRY……………………………………………………………77
10. BIBLEOGRAPHY ………………………………………………79

7
CHAPTER 1
1.1 INTRODUCTION TO INDIAN TEXTILE WORLD
The textile industry occupies a unique position in the Indian economy as it
contributes significantly to the industrial production, employment generation
and foreign exchange earnings.

The Indian textile industry is extremely complex and varied with hand-spun
and hand-woven sector at one of the spectrum and the capital-intensive
sophisticated mill sector at the other, with the decentralized power loom and
knitting sector coming in between.

This industry use natural fibers –cotton, jute, silk and wool, as well as
synthetic man-made fibers- polyester, viscose, nylon, acrylic and their
multiple blends.

The complex and varied structure of the industry coupled with our ancient
culture and tradition provides it with the unique capacity to produce, with the
help of latest technological inputs an designs capability, a wide variety of
products suitable to varying consumer tastes and preferences, both within the
country and overseas.

The textile industry has shown remarkable resilience and grown considerably
in terms of installed spindle age, yarn production and output of fabric and
garments.

It is the only industry, which is self-reliant and complete in value chain i.e.
from raw material to the highest value added products- garments/made-ups.
Therefore the growth and development of his industry has significant bearing
on the overall development of the Indian economy.

The scope of improvement that can be made on the employment front with in
a very short span of time with minimum investment, only if government of

8
India places it as per priority industry like some of our neighboring countries
have. Thus garment manufacturing and export industry that is the real engine
of growth for the whole textile sector in India. With substantial and
development of this sector, there is much scope for the growth of Indian
textile for exports.

With promise of greater globalization and liberalization, Indian textile

industry seems to be looking ahead with both challenges and innovation, to
have close look at how major structural changes in world economy will affect
to prospects of Indian textile industry.

In light of this, a review of Indian textile scenario in particular and the world
situation in general will help all sectors of Indian Textile Industry to re-
organize themselves to face new challenges both known and unknown that
may come in future. Thus we find many scopes in development of Indian
Textile Industry.

1.1. INTRODUCTION TO THE ORGANIZATION

Our company was incorporate as a limited company 1971 under the

company’s act 1956 in the state of Rajasthan having the name “BSL Ltd.”.
It’s Chairman – Emeritus is L. N. Jhunjhunwala. “BSL Ltd” is the part of
LNJ Bhilwara Group.

Our company is presently engaged in the manufacturing o yarn, worsted &

synthetic fabric, readymade garments & accessories.
BSL Ltd. is located in Bhilwara, Rajasthan, the ‘Textile City’ of India. This
industrial township is not only well connected with all the major cities of the
country but is also suitably located in terms of procurement of raw material
as well as accessibility to a modern shipping port.

The company has been a innovator in textile field and conducted its business
with the purpose of growing into a notable organization. Today, despite the
midst of highly fierce and competitive textile markets, BSL is still poised to
serve both local and international markets with a pledge of providing great
9
satisfaction to its customers. In an effort to finalize this vertical plan, there
are plans underway to enter the apparels sector to complete the production
chain from yarn to ready-to-wear garments.

1.2. Related groups

Group BSL Limited have five associates concern.

1) RSWM Limited
2) Maral Overseas Limited
3) BMD pvt. Limited
4) Bhilwara Spinners Limited
5) Bhilwara Processors Limited

1.3. CORPORATE INFORMATION

BOARD OF DIRECTORS:-
CHAIRMAN & MANAGING DIRECTOR:
 MR. A.K.Churiwala

DIRECTORS:-

 Shri Ravi Jhunjhunwala

 Shri Shekhar Agarwal

 Shri R.P.Khaitan

 Shri B.D.Mundhra

 Shri Sushil Kumar Churiwala

10
  Sushil Jhunjhunwala
 R.N.Gupta

 Riju Jhunjhunwala

 Nivedan Churiwala

KEY EXECUTIVES:-

 Shri M.C.Maheshwari Vice President (Export)

 Shri S.Sen Gupta Vice President (Spinning)

CFO & COMPANY SECTORY

Shri Parveen Jain

AUDIT COMMITTEE
During the year, Shri Sushil Jhunjhunwala was co-opted as additional
member of the committee. The Reconstituted Audit Committee as under:-
(i) Shri R.N. Gupta, Chairman
(ii) Shri R. P. Khaitan, Member
(iii)Shri Riju Jhunjhunwala, Member
(iv)Shri Sushil Jhunjhunwala, Member

SHAREHOLDER’S COMMITTEES

The Board of Directors has constituted following Committees for

shareholder related matters:-

I.The shareholder’s / investor’s grievance redress committee has

following member:-

11
 (i) Shri R.P. Khaitan, Chairman (Non-Executive)
(ii) Shri Ravi Jhunjhunwala, Member (Non- Excutive)
(iii) Shri A.K. Churiwal, Member (Chairman & Managing
Director)

II. The second committee is Share Transfer Committee, which has

following members:-
1) Shri A.K. Churiwal
2) Shri Nivedan Churiwal
3) Shri R.N. Gupta
4) Shri Sushil Jhunjhunwala

AUDITORS:

M/S A.L.Chechani & Co.,

Chartered Accountants (Bhilwara)

BANKERS:

Oriental Bank of Commerce

The Bank of Rajasthan Limited

Union Bank of India

State Bank of India

REGISTERED OFFICE:

26, Industrial Area, Post Box No. 17,

Gandhi NAGAR

12
 Bhilwara – 311001 (Rajasthan)

WORKS

MANDPAM, Dist. BHILWARA – 311001 (Rajasthan)

WIND ENERGY PLANT

Village Gorera, Jaisalmer – 345001 (Rajasthan)

1.4. BUSINESS OVERVIEW

Our company is currently engaged in manufacture of combed & carded

cotton yarns ranging. These yarns are suitable for application such as
apparels, terry towel, denims medical fabrics, furnishing fabrics & industrial
fabrics. Further as apart of vertical integration, our company has installed
knitting machine. Our company has capacity to knit single jersey, rib &
interlock fabric & other possible structures. Knitting is the cheapest & fastest
process of converting yarn into fabrics. The knitted fabrics produced by our
company are used for made ups in apparel &garment industry.

Our company has installed plant & machineries imported from textile
machinery manufacturers like Switzerland, Italy, Germany, Czechoslovakia.
We have also installed plant & machineries purchased from Laxmi Machine
Works, Kiloskar Toyoda Textile Machine & Zinser Textile System.

We have continuously expanded & modernized our facilities in the line with
the industry trend, which has also been supported day term loans from
financial institution & banker under the Technology Up gradation Fun
Scheme (TUFS) introduced by government of India.

13
 Our company has a Captive Power Plant of 3.5 MW based on furnaces oil
along with standby arrangement for electricity.

Our Company is exporting cotton yarns & knitted to countries like Austria,
China, Norway, Italy, U.K., U.S.A., Spain, Germany, Canada and other.

1.5. PRODUCT WE MANUACTURE :

Offering a diverse products line to fulfill demand of customer worldwide, we

have perfected our spinning processes by applying state-o-the-art automated
technology & innovation to every phase of our yarn manufacturing process.
We are recognized worldwide as the industry leader for spun yarns due to our
continued focus on product quality & our commitment to extraordinary
customer service.

YARN

Open End Yarn

Multifold Open End Yarn

Ring Spun Combed Yarn

Multifold Ring Spun Yarn

Z & S Twist Yarn

KNITTED FABRICS

 Single Jersey fabrics customer requirement plain pique, fleece &

various structures as per customer requirement.
14
  Rib fabrics manufacturing, Thermal Milano & various structure as
per customer requirement.

Interlock fabrics manufacturing plain I/L, Eight lock, Double Face I/L &
other structure as per customer requirement.

1.5.1 PRODUCT APPLICATION

In a world full o competitiveness & commitment to fulfill specific

customer requirement, BSL Limited translate conceptual ideas of our
customer into reality & shape them through our technical bent & professional
acumen. We strongly believe that the customer satisfaction is essence of
marketing.

Our yarns are used to produced a diverse range of high quality products.
Our major products are listed below:

 MAYUR SUITING

 BSL SUITING

 MELANTRA MELANGE YARN

 LA ITALIA TROUSER GARMENTS

 GEOFFREY HAMMONDS FABRIC

15
 1.5.2 FOCUS ON GLOBAL MARKET

The year 2008-09 was a challenging year for domestic & exports market.
The BSL Ltd. has been focusing on emerging markets of Indo-China,
Middle-East and Latin America, Where traditional system are still
thriving. In the year 2008-09 for the first time crossed Rs. 100 crore
export mark, and anticipates growth in these and other developing
countries.

Innovative design and product are becoming essential to meet consumer’

ever evolving demands and choice. The company therefore has set up a
state-of-the-art technology design centre.

A.K. CHURIWAL
(MANANGING DIRECTOR)

16
1.6 KEY STRENGTHES

The key strengths associated with BSL LIMITED include:

 Captive power plant: The Company has installed WIND POWER PROJECT
in Jaisalmer. The Wind Power had generated 35.25 Lac units during the year.

 Information Technology: A robust IT platform with “BSL” enables a seamless

integration of management practices with business processes at BSL resulting
in the achievement of optimum speed, efficiency, transparency, internal
control & overall profitability.

 Logistics Management: An efficiency in logistics management helps

rationalize freight costs, shrinking the truck turnaround time & delivery
efficiency.

 Manufacturing: BSL has consistently increased cement production through

effective debottlenecking and a high sweating of assets. The company has
enhanced productivity through improved kiln operations, better raw material
mix and optimum utilization of human & financial resources.

Besides these, BSL exhibits unique strength in:

 Quality Management

 Raw Material Management

 Human Resources Management

 Internal Control Systems Management

 Risk Management
17
 Outlook

1.7 Vision and Mission

BSL Ltd. is committed to operating a successful business by developing

manufacturing, manufacturing & supporting quality yarn products for global
textile industry we shall accomplish by:

VISION
 Remain at the forefront in high quality textile products manufacturing

 Create value for shareholder & allied industries

 Completing our vertical integration chain by entering into high quality

apparel manufacturing

 Endeavour for the ultimate satisfaction of our allied partners with

MISSION
 Developing long tern relationship with suppliers with an aim to be the
most reliable supplier in textile to garment

 Providing superior quality products at competitive price & establishing a

brand value in the international arena

 Exceeding industry standards with exceptional customer &technical

service

18
1.8 FINANCIAL DEPARTEMANT

Need of money for every organization is the same as the need of blood in the
human body. Money is the means through which an organization achieves its goals.
The finance dept of the company has all financial records related to company
transactions. Mainly the functions of the dept. can be divided in the three major
categories:-

TOP LEVEL:
As this level, high authorities are involved in planning and controlling the
financial issues. They plan, direct, coordinate and control the resources, its
allocation and proper utilization in order to take maximum benefit from it.

MIDDLE LEVEL
At this level, personnel get the instructions from the high authority and follow
them. They collect information, prepare documents and statements and check them
out in the order to implement the planning. They are the head of particulars section
of finance department & then report to the higher level personnel about the result of
their respective section that help out to higher authority to prepare further strategy.

LOWER LEVEL
It includes the accounting jobs. Those peoples are engaged in rerecording the
truncation into primary books, transferring them into ledger and finally preparing the
balance of every account. These all records are done through computers.

19
The debt, prepares bank report for updating bank transactions. For collecting debts
from debtors. List of debtors is prepared then invoices are sent to them. If any debtor
fails to make its account clear then reminders are sent to them. Since the company is
much attentive towards maintaining cordial relationship with outsiders so to refer the
case of unpaid debtors is rarely to the court. In order to clear the creditors account
when invoices are sent by then it is checked out and finally payments are made to
them either though , cheques or by transferring the amount in their bank accounts,
and consumption the monthly report is prepared. Quarterly Balance sheet is prepared
which shows the financial o the company.

FINANCIAL PERFORMANCE IN YEAR 2007-2008

PARTICULAR 2006-2007 2007-2008

Turnover 182.09 178.88

Export 102.14 103.37

PBIDT 16.80 13.91

Interest 8.45 12.81

Depreciation 7.58 9.96

Taxation 1.17 (2.31)

PAT (0.40) (6.55)

Gross Block 202.41 205.41

Less : Depreciation 106.35 115.91

Net Block 96.06 89.51

Net Worth 46.68 40.12

20
1.9 MANAGERIAL CHALLENEGS FACED

In today’s world of global competition, it is imperative to raise the efficiency

level of the organization through the measures like cost cutting and
improvement in technology. In this scenario, jobs like planning capital
expenditure, maintaining Cash balances, monitoring day to any transaction,
planning and managing tax liability, keeping accounting records and
preparation and presentation of financial statements becomes very crucial.
Also, investment decisions, financing decision and capital structure policies or
the company must be made with utmost care, as all these decisions have a
very strong bearing on the overall performance of the company. Every firm
needs funds, both for its day to day activities and for future endeavors. So, the
most important function is to raise short-term and long-term loans at the
lowest interest rates possible.

Similarly the challenges before the BSL Limited can be summarized as below:

 To devise innovative methods of borrowing to further decrease the cost

of funds,

 Keeping the working capital requirements at lowest possible levels,

 Maintaining good relationship with banks and other financial

institutions,

 Maintaining high credit rating, as it directly affects the rate of interest at

high borrowing will be made by firm.

21
2 OBJECTIVE AND SCOPE OF THE STUDY

II.1 OBJECTIVE

The principal objective of the project is to study and analyze the complete
process of financing of working capital from banks. The objective of the
present study is limited to mere understanding of the procedure of Working
Capital financing and estimating of Working Capital for the current year.

2.2 SCOPE
At BSL LIMITED the entire exercise of Working Capital Financing either
for getting any new sanction or reviewing the exiting borrowing limits is
carried out at the start of the financial year. During the course of this
project, I was able to get firsthand experience of all the documentation
and fulfillment of other formalities laid under the bank norms for getting
the funds sanctioned.

It my study of the process of Working Capital Financing at BSL Limited, the

following points have been covered:

 Complete Analysis of the last year’s performance and critical of the

inventory levels, debtors, creditors and other important factors affecting
working capital needs,
 Computation of Working Capital requirement for the current year and
assessment of borrowing limits,
 Preparing CMA and other supporting documents,

 Application to consortium of banks,

 Clearance of any objection raised by the member Banks,

22
  Creation of Security.
CHAPTER 3

LITERATURE SURVEY
3.1 WHAT IS WOKING CAPITAL

“Working Capital” refers to the cash a business requires for day-to-day

operations, or more specifically, for financing the conversion of raw material into
finished goods, which the company sells for payment. Working Capital typically
means the firm’s holding of current or short-term assets such as Cash, Receivables,
Inventory, and Marketable Securities. These items are also referred to as
“Circulating Assets” because of their cyclical nature. In a retail establishment, cash
is initially employed to purchase inventory which is in turn sold on credit and results
in accounts receivables. Once the receivables are collected, they become cash, part
of which is reinvested in additional inventory and party going to the profit or cash
thro-off. According to the Balance Sheet concept, it is simply represented by the
excess of current assets over current liabilities and is the amount normally available
to finance current operations. In this case the Current Assets are called Gross
Working Capital and the excess of Current Assets over Current Liabilities is called
Net Working Capital.

Current assets mainly include, stocks of raw materials, work-in-progress, finished

goods, trade debtors, prepayments and cash balances. Whereas the main components
of Current liabilities are trade creditors, accruals, taxation payable, dividends
payable and term and short term loans.

In financial reporting, the term “funds” has usually been defined as Working
Capital, or the excess of current assets over current liabilities.

23
CHAPTER 4
CONCEPT OF WORKING CAPITAL
There are two concepts of Working Capital:

Gross Working Capital

It refers to the firm’s investment in total current or circulating assets.

Net Working Capital

The term ‘Net Working Capital’ has been defined in two different ways:

i. It is the excess of current assets over current liabilities. This is, as a matter of
fact, the most commonly accepted definition. Some people define it is as only
the difference between current assets and current liabilities. The former seems
to be a better definition as compared to the latter.

ii. It is that portion of a firm’s current assets which is financed by long-term

funds.

For example, a business requires investment in current assets such as cash,

accounts receivable and short-term investment etc. to the extent of Rs. 15000.
A part of this requirement can be financed by the firm by purchasing on credit
or postponing certain payments or, in other words, by creation of current
liabilities such as accounts payable, outstanding expenses etc. suppose the
amount of current liabilities comes to Rs. 10,000. This means the business still
needs Rs. 5,000 for its working capital purposes. This amount will have to be
financed from long-term sources of funds as indicated in the definition of Net
Working Capital given above.

24
4.1 NEEDS FOR WORKING CAPITAL

The basic objective of financial management is to maximize shareholders’

wealth. This is possible only when the company earns sufficient profit. The
amount of such profit largely depends upon the magnitude of sales. However,
sales do not convert into cash instantaneously. There is always a time gap
between the sale of goods and receipt of cash. Working Capital is required for
this period in order to sustain the sales activity. In case adequate working
capital is not available for this period, the company will not be in a position to
sustain the sales since it may not be in a position to purchase raw materials,
pay wages and other expenses required for manufacturing the goods to be
sold.

4.2 TYPES OF WORKING CAPITAL

Working capital can be divided into two categories on the basis of time.

1. Permanent Working Capital

2. Temporary or Variable Working Capital.

4.2.1 Permanent Working Capital

This refers to that minimum amount of investment in all current assets which is
required at all times to carry out minimum level of business activities. In other
words, it represents the current assets required on a continuing basis over the
entire year. Tondon Committee has referred to this type of working capital a
‘core current assets’.

The following are the characteristics of this type of working capital:

25
 1. Amount of permanent working capital remains in the business in one form
or another. This is particularly important from the point of view of financing.
The suppliers of such working capital should not expect its return during the
life-time of the firm.
2. It also grows with the size of the business. In other words, greater the size of
the business, greater is the amount of such working capital and vice versa.

Permanent working capital is permanently needed for the business and therefore
it should be financed out of long term funds.

4.2.2 TEMPORARY WORKING CAPITAL

The amount of such working capital keeps on fluctuating from time to time on the
basis of business activities. In other words, it represents additional current assets
required at different times during the operating year. For example, extra inventory
has to be maintained to support sales during peak sales period. Similarly, receivables
also increase and must be financed during period of high sales. On the other hand
investment in inventories, receivables, etc., will decrease in period of depression.

Suppliers of temporary working capital can expect its return during off season
when it is not required by the firm. Hence, temporary working capital is generally
financed from short-term sources of finance such as bank credit.

The diagrams given below illustrate the difference between permanent and
temporary working capital. In Fig. 1, permanent working capital is fixed over a
period of time, while temporary working capital is fluctuating. In Fig. 2, the
permanent working capital is increasing over a period of time with increase in the
level of business activity. This happens in case of a growing company. Hence, the
permanent working capital line is not horizontal with the base line as in Fig.1.

26
 Temporary or

Amount of working capital fluctuating

(Rs.) Permanent

Time

Fig. 1

Amt. of working capital Temporary or

(Rs.) Fluctuating
27
 Permanent

Time

Fig. 2

4.3 ADEQUACY OF WORKING CAPITAL

A firm must have adequate working capital, i.e., as much as needed by the firm. It
should neither be excessive nor inadequate. Both situations are dangerous. Excessive
working capital means the firm has idle funds which earn no profits for the firm.
Inadequate working capital means the does not have sufficient funds for running its
operations which ultimately result in production interruptions and lowering down of
the profitability.

It will be interesting to understand the relationship between working capital, risk

and return. In a manufacturing concern, it is generally accepted that higher levels of
working capital decrease the profitability too. While lower levels of working capital
increase the risk but have the potentiality of increasing the profitability also. This
principle is based on the following assumption:

i. There is direct relationship between risk and profitability−higher is the risk,

higher is the profitability, while lower is the risk, lower is the profitability.

ii. Current assets are less profitable than long-term funds.

iii. Short-term funds are less expensive than long-term funds.

On account of the above principle, an increase in the ratio of current assets to total
assets will result in decline in the profitability of the firm. This is because
28
investment in current assets, as stated above, is less profitable than that in the fixed
assets. However, an increase in this ratio would decrease the risk of the firm
becoming technically insolvent. On the other hand, decrease in the ratio of current
assets to total assets would increase the profitability of the firm because investment
in fixed assets is more profitable than the investment in current assets. However, this
will increase the risk of the firm becoming technically insolvent on account of its
possible inability of meeting its commitments in time due to shortage of funds.

SOURCES OF WORKING CAPITAL

The working capital requirements should be met both from short-term as well as
long-term sources of funds. It will be appropriate to meet at least 2/3(if not the
whole) of the permanent working capital requirements from long-term sources and
only for the period needed.

The financing of working capital through short-term sources of funds has the
benefits of lower cost and establishing close relationship with the banks.

Financing of working capital from long-term resources provides the following

benefits:

(i) It reduces risk, since the need to repay loans at frequent intervals is
eliminated.
(ii) It increases liquidity since the firm has not to worry about the payment
of these funds in the near future.

The financing manager has to make use of both long-term and short-term sources
of funds in a way that the overall cost of working capital is the lowest and the fund
are available on time and for the period they are really needed.

APPROCHAES FOR DETERMINING THE FINANCING MIX

There are three basic approaches for determining the working capital financing mix.

(i) The hedging approach. According to this approach, the maturity of source
of funds should match the nature of assets to be financed. The approach is,
29
 therefore, also termed as ’Matching Approach’. It divides the requirements of
total working capital funds into two categories.

a) Permanent Working Capital, i.e., funds required for purchase of core

current assets. Such funds do not vary over time.
b) Temporary or Seasonal Working Capital, i.e., funds which fluctuate over
time.

The permanent working capital requirement should be financed by long-term funds

while the seasonal working capital requirements should be financed out of short-
term funds.

(ii) The conservative approach. According this approach all requirements of

funds should be met from long-term sources. The short-term sources should
be used only for emergency requirements.
The conservative approach is less risky, but more costly as compared to the
hedging approach. In other words conservative approach is ‘low profit-low
risk’ (or high cost, high net working capital) while hedging approach results
in high profit-high risk (or low cost, low net working).

(iii) Trade-off between hedging and conservative approaches. The hedging

and conservative approaches are both on two extremes. Neither of them can
therefore help in efficient working capital management. A trade-off between
these two can give satisfactory results. The level of such trade-off will differ
from case to case depending upon perception of the risk by the persons
involved in financial decision-making. However, one way to determining the
level of trade-off is by finding the average of the minimum and the
maximum requirements of working capital during period. The average
working capital so obtained may be financed by long-term funds and the
balance by short-term funds.
For example, if during the quarter ending 31 st March 2000, the minimum
working capital required is estimated at Rs.10,000 while the maximum at
Rs. 15,000 the average level comes to 12,500[i.e. (10,000 + 15,000) ÷ 2].
The firm should therefore, finance Rs. 12,500 from long-term sources while
30
 any extra capital required any time during the period, from short-term
sources (i.e., current liabilities).

4.3 SOURCES OF FUNDS

Transactions that increase working capital are sources of funds. The primary sources
of working capital of a firm include:

 Funds generated from operations:

The earnings of a business represent one of the principle “sources of funds”.
The amount of funds generated from operations is not the net income shown
in the income statement, because some of the expanses, principally
depreciation and amortization, do not involve the expenditure of funds. In
order to determine working capital provided by operations, it is necessary to
deduct from revenues only those expenses which require an expenditure of
funds and therefore cause a reduction in working capital. A convenient way
of determining working capital from operations is simply to add back to
net income all those expenses, which did not require an outlay of funds,
i.e. working capital.

Certain items include in the income statement decreases without increasing

working capital like Payment of premium on bonds payable causes interest
expenses to be less than the amount of cash paid. Therefore, these items
should be deducted from net income in computing the amount of working
capital provided by the operations.

The computation o the working capital fund provided by operations any be

summarized as follows:

Net income + items reducing Net Income which do not affect Working
capital + Non-operating Losses - Non –operating Gains - Items
increasing Net Income which do not affect working capital.

 Increase in Long-term liabilities:

31
 A second source of funds is long –term borrowing. A positive change in the
long-term borrowings is a source of fund whereas a negative change is a use
of fund.

 Increase in share capital:

If a firm has issued share capital during the period, the amount for which the
shares were sold is a source of funds.

 Sale of fixed assets(Non Current Assets)

This will be another source of funds equal to the proceeds from the sale.

4.6 USES OF FUNDS

Truncations that decrease working capital are classified as uses of funds.

Typical uses of working capital include:

 Purchase of fixed Assets: (Non Current Assets)

One of the major uses of funds is the purchase of non-current assets,

principally land, building, machinery investment, and intangible assets. Non-
current assets accounts are not affecting only by purchases, but also by the
amount of depreciation taken the year and the sale or dispositions of assets
during the year.

 Dividends:
The declaration of cash dividends to be paid at a later date is also a use of
funds. Working capital is reduced at the time the declaration is made because
a current liability, dividends payable, is incurred and recorded at that time.

 Decrease in long-term liabilities:

Funds may be used to pay-off long-term liabilities, so a decrease in long-term

liability is a use of funds.
32
4.7 CHANGES IN WORKING CAPITAL

In determine changes in working capital, only those accounts are considered

which determines the working capital and the accounts not include in working
capital (i.e., non-working capital accounts ) at the same time.

Truncations that involve only working capital accounts or non-working

capital may be ignored in determining the changes in working capital. For
example: If a cash payment is made to creditors, working capital is not
affected because cash (and current assets) and creditors (and current
liabilities) decrease by equal amounts. Likewise, if shares are exchanged for a
machine, capital does not change because no working capital accounts are
involved in exchange. Transactions like transfer from long-term assets to
current assets or current liabilities viz sale of fixed assets, transfer of a long-
term assets to a creditor satisfying a current debt, etc increase the working
capital. Whereas transactions like transfer from current assets to long-term
assets or long-term liabilities viz purchase of fixed assets, debentures payable
paid from cash, etc decrease the working capital.

4.8 WORKING CAPITAL CYCLE AND KEY RATIOS:

Working Capital Cycle refers to the period of time which elapses between
the point at which cash begins to be expended on the production of a product
and the collection of cash from a customer. This cycle or loop starts at the
cash and marketable securities account, goes though the current accruals
accounts as direct labour and materials are purchased and used to produce
33
inventory, which is in turn sold and generates accounts receivable, which are
finally collected to replenish cash. The major point to notice about this cycle
is that the turnover (or velocity) of resources through this loop is very high as
compared to the other inflow and outflow of the cash account.

34
`

Accrued Director Labour Accrued Fixed

Operating

Production
Used to purchase Cash and Marketable

Process

Generates

Used to

Inventory Purchase

Collection

Process

External
35
Via Sales Financing

Generates Return on

Capital

Accounts Receivable Suppliers of Capital Fixed Assets

Each of the boxes in the above diagram can be seen as a tank through which
funds flow. These tanks, which are concerned with day-to-day activities, have
funds constantly flowing into and out of them.

The faster a business expands the more cash it will need for working capital
and investment. The cheapest and best sources of cash exist as working capital
right within the business. Good management of working capital will generate
cash, will help improve profits and reduce risks. Bear in mind that the cost of
providing credit to customers and holding stocks can represent a substantial
proportion of a firm’s profit.

There are two elements in the business cycle that absorb cash- Inventory
(Stocks and working-in-process) and Receivables (debtors owing you
money). The main sources of cash payable (your creditors) and Equity and
Loans.

All the above periods’ are measured in days to calculate the final Working
Capital Cycle or the Cash Conversion Cycle. Each component of working
capital (namely inventory, receivables and payables) has two dimensions-
TIME and MONEY. When it comes to managing working capital- TIME IS
MONEY. If you can collect money due from debtors more quickly or reduce
inventory levels relative to sales, the business will generate more cash or it
will need to borrow less money to fun working capital. Similarly, if terms

36
with suppliers can be improved e.g. getting longer credit or an increased credit
limit, then free finance to help fund future sales can be created.

Table 2. Key Ratios, their formulas and interpretation

The key ratios, their formulae and their interpretation, which are important in
measuring the Working Capital Utilization, are given in the table below:-

RATIO FORMULA RESULT INTERPRETATION

Inventory Average = X daysOn average, the value of the
turnover (in stock*365/Cost of entire stock is turned over x
days) Goods sold days. Obsolete stock. Slow
moving lines will extend overall
stock turnover days. Faster
production, fewer product lines,
just in time ordering will reduce
average days.
Receivable Debtors*365/Sale = X days It take on an average x days to
s ratio (in s collect monies due on the
days) debtors. One or more large or
slow debts can drag out the
average days. Effective debtor
management will minimize the
days.
Current Total Current = X times Current Assets are assets that can
Ratio Assets/Total readily turn in to cash or will do
Current Liabilities so within 12 months in the
course of business. Current
liabilities are amount which are
due to pay within the coming 12
months. CR less than1 times e.g.
0.75 means that one could have
liquidity problems and be under
pressure to generate sufficient
cash to meet oncoming demands.
Quick (Total Current = X times Similar to the Current Ratio but
Ratio Assets- takes accounts of the fact that it
37
 Inventory )/Total may take time to convert into
Current Liabilities cash.
Working (Inventory + As % A high percentage means that
Capital Receivables - sales working capital needs are high
Ratio Payables)/Sales relative to your sales.

4.9 ESTIMATING WORKING CAPITAL REQUIREMENTS

In order to determine the amount of working capital needed by the firm, a
number of factors viz.production policies, nature of business, length of
manufacturing process, credit policy, rapidity of turn-over, seasonal
fluctuations. Etc. are to be considered by the Finance Manager. a finance
Manager can apply any of the following techniques for assessing the
working capital requirements of a firm.
Techniques for Assessment of the working Capital Requirements
Following is a brief explanation of the various techniques for assessment
of a firm’s working capital requirements:
1. Components of Working Capital Approach: since working capital
is the excess of current assets over current liabilities, an assessment of
the working capital requirements can be made by estimating the
amounts of different constituents of working capital e.g., inventories,
accounts receivables, cash , accounts payable etc.

2. Percent of Sales Approach: this is a traditional and simple method of

estimating working capital requirements. According to this method, on
the basis of past experience between sales and working capital
requirements, a ratio can be determined for estimating the working
capital requirements in future. For example, if the past experience
38
 shows the working capital has been 30% of sales and it is estimated
that the sales for the next year would amount to rupees one lac, the
amount of working capital requirement can be assessed as Rs. 30,000.
The basic criticism of this method that it presumes a linear
relationship between sales and working capital. This is not true in all
cases and method is not universally acceptable.

3. Operating Cycle Approach:

According to this approach, the requirement of working capital depends upon the
operating cycle of the business. Working capital is required because of the time gap
between the sales and their actual realization in cash. This time gap is technically
termed as ‘operating cycle’ of the business.

In case of a manufacturing company, the operating cycle is the length of time

necessary to complete the following cycle of events:

(i) Conversion of cash into raw material;

(ii) Conversion of raw material into WIP
(iii) Conversion of WIP into finished goods
(iv) Conversion of finished into accounts receivables, and
(v) Conversion of accounts receivables into cash.

This cycle will be repeated again and again.

The operation cycle of a manufacturing business can be shown as in the following

chart.

ACCOUNTS
RECEIVABLES

CASH FINISHED
39
GOODS
 RAW WORK-IN-
MATERIAL PROGRESS

Operating Cycle of a Manufacturing Business

In the case of a ‘trading firm’ the operating cycle will include the length of time
required to convert (i) cash into inventories (ii) inventories into accounts receivables,
and (iii) accounts receivables into cash.

In case of a ‘manufacturing firm’, the operating cycle includes the length of time
taken for (i) conversion of case into debtors, and (ii) conversion of debtors into cash.

Estimation of the Amount of different Components of Working

Capital
Since working capital is excess of current assets over current liabilities, the forecast
for working capital requirements can be made only after estimating the amount of
different constituents of working capital. The procedure for estimating the amount of
each of the constituents of working capital and the information required for the
purpose, are discussed below:-

1. Inventories. The term ‘inventories’ includes stock of raw material, work-in-

progress and finished goods. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow; Supply chain
management; Just In Time (JIT); Economic order quantity (EOQ); Economic
production quantity

The estimation of each of them will be made as follows:

(a.) Stock of Raw Material. The average amount of raw material to be kept in
stock will depend upon the quantity of raw materials required for production
during a particular period and the average time taken in obtaining a fresh

40
 delivery. Suitable adjustment may have to be made to provide for contingencies
and seasonal factors.

(b.) Work-in-progress. The cost of work-in-progress includes raw material, wages

and overheads. In determining the amount of work-in-progress, the time period
for which the goods will be in the courses of production process, is most
important.

(c.) Finished Goods. The period for which the finished goods have to remain in the
warehouse before sales in an important factor for determining the amount
locked up in finished goods.

1. Sundry Debtors. The amount of funds locked up in Sundry Debtors will be

computed on the basis of credit sales and the time-leg in collecting payment.
Identify the appropriate credit policy, i.e. credit terms which will attract
customers, such that any impact on cash flows and the cash conversion cycle
will be offset by increased revenue and hence Return on Capital (or vice versa);
Discounts and allowances.

2. Cash and Bank Balances. The amount of money to be kept as cash in hand or
cash at bank can be estimated on the basis of past experience. Every
businessman knows the amount that he will require for meeting his day-to-day
payments.

3. Sundry Creditors. The leg in payment to suppliers of raw material goods, etc.,
and the likely credit purchases to be made during the period will help in
estimating the amount of creditors.

4. Outstanding Expenses. The time-leg in payment of wages and other expenses

will help in estimating the amount of outstanding expenses.

41
4.10 WORKING CAPITAL MANAGEMENT

Working capital management of all aspects o both current assets and current
liabilities, so as to minimizing return on assets. Even profitable companies fail if
they have inadequate cash flow. Liabilities are settled with cash, not profits. The
primary objective of working capital management is to ensure that sufficient cash is
available to:

 Meet day-to-day cash flow needs,

 Pay wages and salaries when they fall due,

 Pay creditors to ensure continued suppliers of goods and services,

 Pay government taxation and providers of capital-dividends and interest, and

 Ensure long-term survival of the business entity.

Poor working capital management can lead to:

 Over capitalization (an therefore waste though under utilization of resources

and hence poor returns), and

 Overtrading (trying to maintain a level of sales which is higher than working

capital can sustain-for businesses which extend credit terms, more sales means
more debtors and higher working capital demands).

Basically Working Capital Management is the process to shorten the

working capital cycle as much as possible with the most efficient use of
the available resources. This can be done by reducing the inventory
42
conversion period and receivable collection period or by increasing the
payable deferral period.

4.11 OPTIMUM LEVEL OF WORKING CAPITAL

The conventional definition of Working Capital, in terms of the difference

between current assets and current liabilities is somewhat confusing. Working
capital is really what a part of long-term finance is locked and used for
supporting current activities consequently, larger the amount of working
capital so derived, greater the proportion of long-term capital sources
siphoned off to short-term activities. It is difficult to say whether this is right
or wrong. A relatively large amount of working capital according this
definition may produce a false sense o security at a time when cash resources
may be small or when these may be provided increasingly by long-term fund
sources in the absence of adequate profits. So the impossibility is that current
assets which are relied upon to yield cash must themselves to be supported by
long-term funds until they are converted into cash. Strategies that utilize
investment or financing with working capital accounts often offer a substantial
advantage over other techniques. Several strategies may be formulated to
address the uncertainty regarding the levels of its future cash flow and the
costs that may engender. Among these strategies are some that involve
working capital investment or financing suck as holding additional cash
balances beyond expected needs, holding a reserve o short-term marketable
securities, or arranging for the availability of additional short-term borrowing
capacity.

One of the major features of this world is uncertainty (risk), and it is this
feature that gives rise to many of the strategies involving working capital
accounts. Moreover, a firm’s net working capital position is not only
important from an internal standpoint; it is also widely used as a measure of

43
the firm’s risk. Risk deals with the profitability that a firm will encounter
financial difficulties. Such as the inability to pay bill on time. All other things
being equal, the more net working capital a firm, the more likely that it will be
able to meet current financial obligations. Many loan agreements with
commercial banks and other lending institutions contain a provision requiring
the fir to maintain a minimum level of net working capital position likewise;
bond indentures also often contain such provisions. With the liquidity-
profitability dilemma solidly authenticated in the financial scheme of the
management, concerted efforts are made to ensure the ability of the firm to
meet those obligations which mature within a twelve month period. Keeping
all the factors in mind, management decides the levels of current assets,
despite the fact that sales dictate some fluctuations in short-term assets
investment. Excessive current assets are usually not advisable because they
are generally not considered to be the “Earning Assets” o the firm. The yield
from short-term assets is usually quite high. So, management may be
considered to be aggressive or conservative according to investment in current
vs. long-term assets.

Not all Companies and businesses are similar. Different industries have
different optimum working capital profiles, reflecting their methods of doing
business and what they are selling. Businesses like supermarket with a lot of
cash sales and few credit sales should have minimal trade debtors, some
seasonal business like travel agencies will receive their money at certain times
of the year although they may incur expenses receive their monies at certain
times of the year, although they may incur expenses throughout the year at a
fairly consistent level. Some finished goods, notably foodstuffs have to sell
within a limited period because of their perishable nature. The size nature of
firm’s investment in current assets is a function of a number of different
actors, including following:

 the type of products manufactured and the length of the operating cycle,

44
  the sales level, as higher sales require more investment in inventories
and receivables.

 Inventory policies, e.g. the amount of safety stock maintained,

 Credit policies,

 Efficiency in Management of current assets.

Some companies are inherently better placed then others. Insurance

companies, for instance, receive premium payments up front before having to
make any payments. However, insurance companies do have unpredictable
outgoing as claims come in. normally a big retailer like WAL-Mart has little
to worry about when it comes to accounts receivable, as customers pay for
goods on the spot. Inventories represent the biggest problem for retailers, who
must perform rigorous inventory forecasting or they risk being out of business
in a shot-tem. Manufacturing companies, like Shree Cement, incur substantial
up-front costs for materials and labor before receiving payments. Much of the
time they eat more cash than they generate.

4.12 WOKING CAPITAL FINANCING & POLICIES

Working capital is taken to be the life-blood of a business. That is

way, working capital management of a firm is considered to be one of the
most important tasks of financial managers. A decision regarding the
volume of current assets has its own importance no doubt, but the question of
financing is in fact the key area o working capital management. Since the
management is very much concerned with proper financial structure, these
and other funds must be raised judiciously.

Various sources of Working Capital financing are bank borrowings,

public deposit, trade credit, long- term borrowing and equity capital. Of
45
 the different sources, bank credit has been a major source of working
capital in India and abroad. Frequently, current assets are financed from
short-term loans. Larger the percentage of funds obtained from short term
funds, the more aggressive (and risky) is the firm’s working capital policy and
vice versa. A company’s need for financing is equal to the sum of its fixed
assets and current assts. Current Assts can be divided into the following two
categories:

 Permanent current assets,

 Fluctuating current assets.

Fluctuating current assets are those which are affected by the seasonal o
cyclical nature of a company’s sales. For example, a firm must make lager
investment in inventories and receivables during peak selling periods than
during other periods of the year.

Permanent current assets are held to meet the company’s long-tem needs e.g.
safety stocks of cash and inventories.

4.13 TANDON, CHORE, KANNAN AND CERTAIN OTHER

COMMITTEES RECOMMENDATION
 

Financing of working capital had always been an exclusive domain of

commercial banks. Too much emphasis on security by the banks directed the
flow of credit to affluent section of society with the result that economic
46
resources of the country were concentrated in a few hands. Projects promoted
by technically qualified entrepreneurs with no tangible security to offer found
it difficult to raise finance for the working capital required by them from
banks. With the nationalisation of the banks an entirely new breed of
entrepreneurs made a demand on bank credit. Small sector and other segments
of priority sector were to be the major beneficiary of nationalisation and were
preferred claimants of credit. This resulted in an unexpected demand on
lendable funds of banks and naturally called for a reform in the policies of
banks to orient them to the new developmental role assigned to the banking
industry.

Another important factor which called for reforms was the inbuilt weakness in
the cash credit system linked with emphasis on security. The limits were
directly fixed on the basis of security available in the account which in many
cases resulted in double finance. Banks also had no control over the level of
advances at any particular time. It was not related to how much a bank can
lend at a particular time but was linked to the decision of the borrower to
borrow at that time. A major part of credit limits sanctioned by the bank
remained unutilised and there was a strong tendency within the banks to
oversell the credit. It was noted as at the end of June, 1974 that total limits
sanctioned by the banking industry was far in excess of its total deposits. Bank
could afford this overselling as 43% of the limits sanctioned by them
remained unutilised. Any unexpected demand within the sanctioned limits
could prove disastrous and had the capacity to put the entire banking industry
out of gear. The fear was proved true in late 1973 when a sudden demand on
bank credit was made due to unprecedented rate of inflation and the banks had
to arbitrarily freeze the credit limits of their borrowers.

In view of such a situation obtaining at that time, Reserve Bank of India

constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July,
1974 to frame necessary guidelines on bank credit with the following terms of
reference :

47
 

 To suggest guidelines for commercial banks to follow up and supervise

credit from the point of view of ensuring proper end-use of funds and
keeping a watch on the safety of the advances and to suggest the type of
operational data and other information that may be obtained by banks
periodically from such borrowers and by the, Reserve Bank of India
from the lending banks,

 To make recommendations for obtaining periodical forecasts from

borrowers of (a) business/production plans, and (b) credit needs,

 To make suggestions for prescribing inventory norms for different

industries both in the private and public sectors and indicate the broad
criteria for deviating from these norms,

 To suggest criteria regarding satisfactory capital structure and sound

financial basis in relation to borrowings,

 To make recommendations regarding the sources for financing the

minimum working capital requirements,

 To make recommendations as to whether the existing pattern of

financing working capital requirements of cash credit/overdraft system
etc., requires to be modified, if so, to suggest suitable modifications,
and

 To make recommendations on any other related matter as the Group

may consider relevant to the subject of enquiry or any other allied
matter which may be specifically referred to it by the Reserve Bank of
India.
48
 

Based upon these terms of reference the Group attempted to identify the
various constituents of working capital that could be financed by the banks
and suggested norms for build up of inventory. Far reaching recommendations
on the style of lending and improvement in the present system of Cash Credit
were also made. These recommendations were mostly accepted by Reserve
Bank and were referred to banks for implementation in late 1975. Many
modifications have since been suggested by 'Chore Committee'. Nevertheless
the basis of the recommendations of Tandon Committee have been retained.
The recommendations of the group related to four important aspects as
discussed in the following paragraphs.

Article I. Level of Current Assets

 

Working capital requirement of any unit is directly related to the level of

current assets with the unit. As the main emphasis by the banks had been on
security, the limits were sanctioned on the basis of the value of inventory held
by the unit and no attempt whatsoever was made to assess the requirement of
the unit. The Group analysed the inventory build up of various units and
classified the inventory as under

 Flabby inventory comprising finished goods, raw materials and stores

held because of poor working capital management and inefficient
distribution.

 Profit- making inventory representing stocks of raw materials and

finished goods held for realising stock profits.

49
 Safety inventory providing for failures in supplies, unexpected spurt in
demand etc., in effect, an insurance cover.

 Normal inventory based on a production plan, lead time of supplies and

economic ordering levels. Normal inventories will fluctuate primarily
with change in production plan. Normal inventory also includes
reasonable factor of safety.
 

Some excessive inventory may also have to be built up sometimes due to

factors beyond the control of management as in case of bunched imports etc.
Flabby and profit-making inventory are both non-productive and should be
discouraged. Normal inventory includes an element of safety and it should be
the endeavour of any management not to hold any excess inventory over its
normal requirements. To arrive at this normal level of inventory, 'Tandon
Group' suggested norms for 15 different kind of industries covering a major
part of all industries in the country and the norms related to

 Raw materials
 Stocks in process/semi-finished goods
 Finished goods
 Receivables

Which together make for bulk of the current assets of any unit.

Reserve Bank also appointed various "Committees of Direction" to make

recommendations regarding any changes to be brought in the norms suggested
by the Group. 'Committee of Direction' had also recommended norms for
other industries not included in the initial report of the Group. With the
passage of time it was felt by trade and industry that these norms have become
outdated and needed immediate review in the changing economic scenario.
An ‘In House Group’ under the chair personship of Ms I.T.Vaz, Executive
Director, Reserve Bank of India, was constituted in January 1993 to review

50
the need for continuing with the norms for holding of inventory/ receivables
as also allocation of credit to industry by fixing Maximum Permissible Bank
Finance (MPBF) based on such norms.

As per the recommendations of the 'In House Group' accepted by Reserve

Bank of India, the banks have been given discretion to decide the levels of
holding of individual items of inventory and of receivables, which should be
supported by bank finance after taking into account the production/processing
cycle of an industry as also other relevant factors.

The other factors will include the financial parameters of the borrower. Banks
now have the freedom to decide the levels of holding of each item of
inventory as also of receivables which would represent a reasonable build up
of current assets for being supported by Bank finance. Reserve Bank will not
prescribe detailed norms for each item of inventory as also of receivables; but
only advise the overall levels of inventory and receivables for different
industries for the guidance of the banks to serve as broad indicators. Banks
may also frame suitable guidelines for accepting the projections made by
borrowers relating to 'Sundry Creditors (Goods)', an item included in 'other
current liabilities'. The above guidelines would apply to borrowers enjoying
aggregate fund-based working capital limits of Rs. 1 crore. and above from
the banking system.

4.14 METHODS OF LENDING

Like many other activities of the banks, method and quantum of short-
term finance that can be granted to a corporate was mandated by the
Reserve Bank of India till 1994. This control was exercised on the lines
suggested by the recommendations of a study group headed by Shri
Prakash Tandon.

51
The study group headed by Shri Prakash Tandon, the then Chairman of
Punjab National Bank, was constituted by the RBI in July 1974 with
eminent personalities drawn from leading banks, financial institutions
and a wide cross-section of the Industry with a view to study the entire
gamut of Bank's finance for working capital and suggest ways for
optimum utilisation of Bank credit. This was the first elaborate attempt
by the central bank to organise the Bank credit. The report of this group
is widely known as Tandon Committee report. Most banks in India even
today continue to look at the needs of the corporates in the light of
methodology recommended by the Group.

As per the recommendations of Tandon Committee, the corporates

should be discouraged from accumulating too much of stocks of current
assets and should move towards very lean inventories and receivable
levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate
operating in an industry should be allowed to accumulate These levels
were termed as inventory and receivable norms. Depending on the size of
credit required, the funding of these current assets (working capital
needs) of the corporates could be met by one of the following methods:

 First Method of Lending:

Banks can work out the working capital gap, i.e. total current
assets less current liabilities other than bank borrowings (called
Maximum Permissible Bank Finance or MPBF) and finance a
maximum of 75 per cent of the gap; the balance to come out of
long-term funds, i.e., owned funds and term borrowings. This
approach was considered suitable only for very small borrowers
i.e. where the requirements of credit were less than Rs.10 lacs

 Second Method of Lending:

Under this method, it was thought that the borrower should

provide for a minimum of 25% of total current assets out of long-
term funds i.e., owned funds plus term borrowings. A certain level
of credit for purchases and other current liabilities will be available
to fund the build up of current assets and the bank will provide the
balance (MPBF). Consequently, total current liabilities inclusive of
bank borrowings could not exceed 75% of current assets. RBI
stipulated that the working capital needs of all borrowers enjoying
52
 fund based credit facilities of more than Rs. 10 lacs should be
appraised (calculated) under this method.

 Third Method of Lending:

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

funds will be to the extent of the entire CORE CURRENT
ASSETS, which has been defined by the Study Group as
representing the absolute minimum level of raw materials, process
stock, finished goods and stores which are in the pipeline to ensure
continuity of production and a minimum of 25% of the balance
current assets should be financed out of the long term funds plus
term borrowings.
(This method was not accepted for implementation and hence is of
only academic interest).

As can be seen above, the basic foundation of all banks' appraisal of the
needs of creditors is the level of current assets. The classification of
assets and balance sheet analysis, therefore, assumes a lot of importance.
RBI has mandated a certain way of analysing the balance sheets. The
requirements of this break-up of assets and liabilities differs slightly from
that mandated by the Company Law Board (CLB). The analysis of
balance sheet in CMA data is said to give a more detailed and accurate
picture of the affairs of a corporate. The corporates are required by all
banks to analyse their balance sheet in this specific format called CMA
data format and submit to banks. While most qualified accountants
working with the firms are aware of the method of classification in this
format, professional help is also available in the form of Chartered
Accountants, Financial Analysts for this analysis.

4.15 RECENT RBI GUIDELINES REGARDING WORKING

CAPITAL FINANCE

53
 The following recent changes have been made by RBI in the guidelines for bank
lending for working capital purposes and by way of term loans. These measures
are set out below:-

I. Lending Norms for Working Capital

(a.) Banks would henceforth decide the levels of holding of individual items
of inventory as also of receivables, which should be supported by bank
finance, after taking into account the production/processing cycle of an
industry as well as other relevant factors. RBI would no more prescribe
detailed norms for each item o inventory as also of receivables; it would
only advise the overall levels of inventory and receivable for different
industries to serve as broad indicators for guidance of banks.
(b.) Banks would be free to sanction ad hoc credit limits to borrowers,
where considered necessary and charging of additional interest for this
purpose is no longer mandatory.
(c.) Other aspects of the lending discipline, viz., maintenance of minimum
current ratio, submission and use of data furnished under quarterly
information system etc.,would continue, though with certain
modification, which would make it easier for smaller borrowers, to
comply with these guidelines.

II. Treatment of loan installments for assessment of working capital purposes

Hitherto term loan installment falling due for repayment in the next twelve months
were treated as part of current liabilities for assessment of maximum permission
bank finance (MPBF). In terms of current policy, which was implemented in stages,
such instalments are not required to be treated as an item of current liabilities for the
limited purposes of assessing MPBF. These instalments continue to be treated as
current liabilities for other purposes including for calculation of current ratio.

III. Export Credit

54
(i) In order toensure that the credit requirements of exporters are promptly met
and their additional credit requirements out of firm orders/ confirmed letters
of credit, not taken into account while fixing their regular credit limits, the
banks were advised in December 1992 to sanction such additional credit
limits, even in excess of maximum permissible bank finance (MPBF).
(ii) Borrowing units engagedin export activities need not bring in
anycontribution from their long-term sources towards financing that portion
of current assets as is represented by export receivables.
(iii) Banks were also advised not to apply the Second Method of Lending for
assessment of MPBF to those exporter borrowers, who had to their credit
export of not less than 25 percent of their total turnover during the previous
accounting year provided their aggregate fund-based working capital limits
from the banking system were less than Rs. 1 Crore.
(iv) Withdrawal of Maximum Permissible Bank Finance (MPBF) limits. In
recent years consistent efforts are being made by Reserve Bank to provide
flexibility alongwith discipline in respect of bank credit. As such during 997-
98 consistent with the policy of liberalization banks were allowed full
operational freedom to evolve their own methods of assessing the working
capital requirements of the borrowers within the prudential guidelines and
exposure norms already prescribed and all instructions relating to MPBF
were withdrawn. At the same time effective from October 21, 1997, for all
borrowers with working capital credit limits from the banking system of Rs.
10 crore and above, the loan component was fixed at a uniform minimum
level of 80%. In case of borrowers with working capital credit limit of less
than Rs. 10 crore, banks may persuade them to go in for the ‘loan system’ by
offering more incentives in the form of lower rate of interest on the loan
component as compared to cash credit component.

Both expected profitability and risk increase as the proportion of

short-term debt increase. The company’s net working capital position and
current ratio would depend on the financing policy chosen in summary, a
firm can adopt any of the following policies for financing its working capital
needs:-

(1) Matching Approach to Asset Financing:

55
 In this approach, the maturity structure of the firm’s liabilities is made to
correspond exactly to the life of its assets. This is illus

(2) Conservative Approach to Asset Financing:

(3) Aggressive Approach to Asset Financing:

5 RESEARCH PROBLEMS
The main aim of this project was to study the complete process of Working Capital
Financing, both at BSL Limited in general. Every organization carriers out the
entire exercise of analysis of last year’s performance, assessment of working capital
requirements, and creation of CMA and other documents for the purpose of
obtaining bank borrowing at the end of every financial period. Forecasting the levels
of different components o current assets and current liabilities becomes very crucial,
as on their basis the final working capital requirements are calculated.

56
 CHAPTER 5

RESEARCH DESIGN

5.1 GENERAL METHODOLOGY

The methodology followed in completion of this project study could be

enumerated as follow:

 Analyzing relevant figures

 Study of the complete process of Working Capital Financing

using the literature and by the way of discussions with the
organizational guide,

 Preparing assumptions for the estimation of figures for year

 Using formulae to calculate the absolute values of current assets

and current liabilities and their justification,

 Linking of all the statements to arrive at a final estimation of the

working capital requirements and the Maximum Permissible
Bank Finance (MPBF)

 Creation of CMA and other supporting documents,

 Complete documentation of the project study.

57
5.2 SOURCES OF DATA:

The major sources of data in project study wee past year’s financial
statements and information gathered from my guide. The entire set of
information and data was available within the organization, without any need
for collecting data from outside.

5.3 DATA COLLECTION POCEDURE:

Information was taken directly from the finance Department. Figures and
financial statements for the past 3 years were made available from annual
reports. Literature pertaining to the bank norms and other relevant
documentation was taken from the organizational guide for reference
purposes.

58
CHAPTER 6
PROCESS OF WORKING CAPITAL FINANCING
The process of working capital financing from banks is a very
comprehensive one. It consists of a number of steps starting from assessing
the fund requirements to the step of auditing by the Bank and Auditors. A firm
can get the financing done from a single Bank or a Consortium o Banks.
Generally a firm has to go for a consortium of Banks because every bank has
a limit up to which it can fund the working capital requirements of a firm in a
specific industry.

This is because investing money in a single industry is much riskier than

diversified investments. Banks have to adhere to the norms laid down for
limits of industry exposure (investment) as well as company exposure. Other
steps include the preparation of Credit Monitoring Arrangement (CMA) in
which the future cash flow are projected and accordingly the various
requirements are assessed, which further consolidates into the working capital
requirements in the following year.

Then there is preparation of other supporting documents, applying to the

bank o the lead bank in case of consortium of banks, then appraisal and
sanction by the bank (or banks as the case may be), creation of security,
disbursement of funds and finally monitoring and auditing by the Banks and
the auditors. In appraisal of the loan application by any bank, the most
important part is to award a credit to the firm, on the basis of which the final
for every firm to maintain a high credit rating.

59
 These ratings also help the firm in issuing other instruments like
Commercial Paper, Debentures, etc. also, monitoring by banks constitutes an
important step.

The drawing power of a firm is decided on the basis of the stock levels, as
Cash Credit limit is given after hypothecation of inventory and stocks. So, the
drawing power of a firm keeps on changing according to the levels of the
stock. Therefore reporting of financial position becomes very important. It is
important from the company’s performance on a regular basis. The whole
sequence of Working Capital financing is shown in the following flowchart:

60
PROCESS FLOW CHART FOR WORKING CAPITAL FINANCING

Assessing Working Capital

Requirement

Preparing Application, CMA & other

Supporting Documents

Applying to Bank/Consortium

Single Bank Consortium Bank

Financing

Appraisal by lead Bank

Appraisal & sanction by

single Bank
Circulation of appraisal to
member Banks

Holding of consortium
meeting &appraisal of limits
by member Banks

Sanction by member Banks

Agreement & Creation of

security

Disbursement of Funds

Monitoring of financial progress by

Banks
61

Inspection by Bank and Auditors

CHAPTER 7
7.1 ASSESSING WORKING CAPITAL REQUIRREMENT

The money required for day to day use in a business organization

contribute to the working capital requirements o the firm. Examples of such
activities are payment of electricity bill, salaries & wages, mining
compensation, purchase of raw material, payment of excise and sales tax,
payment of factory and office expenses like telephone bills, travelling
expenses and computer expenses etc.

Working Capital Requirements (WCR) may be defined as the difference

between operating assets (consisting of prepaid, inventory and receivable).
These accounts represent spontaneous uses and sources of funds over the
firm’s operating cycle.

WCR = A/R+INV+PREPAIDS-A/P

All the current assets like raw materials, stock in progress, finished goods,
stores & spares, debtors, loans and advances and cash & bank balances,
constitute the Gross Working Capital. Whereas, the difference between
current assets and current liabilities given the Net Working Capital (NWC). It
is generally agreed that greater the current assets relative to the level of
current liabilities, the more liquid the company is.

62
NWC = CA-CL

Another term Net Liquid Balance (NLB) is defined as the difference

between current financial assets such as cash and marketable securities and
current discretionary or non spontaneous financial liabilities such as notes
payable and current maturities of long-term debt.

NLB = CASH+MKT SECURITIES – NOTES PAYABLE – CURRENT

MATURITIES OF LONG TERM DEBT.

The absolute NLB may be used as a measure of a firm’s liquidity. If the

measure is negative, it indicates a dependence on outside financing and is
indicative of the Minimum borrowing line required. A negative NLB does not
itself suggest that the firm is going to its debt obligations.

From the above equations, the relationship between WCR, NLB and
NWC can be represented as:

NWC = WCR + NLB

Out of the above, Working Capital Requirement is the most appropriate

approach to calculate the real requirements of a firm because the traditional
NWC figure includes accounts that are directly relaxed to the operating cycle.
For example, the marketable securities account, and the notes payable balance
should be viewed as balances that result from internal financial decision and
policies, not balances resulting from the operating cycle of the firm. They
should therefore by exclude from consideration. This approach is consistent

63
with the decomposition of net working capital into net liquid balance and
working capital requirements.

 FORMULAE FOR COMPUTATION O CURRENT ASSETS AND

CURRENT LIABILITIES

Working capital requirements of a firm is calculated as the difference

between the current assets and current liabilities. The levels of the various
components of current assets like raw material, stock-in-process, finished
goods, other consumable spares, receivables, advances to suppliers and other
current assets, are decided by considering the levels of past years and peak
level in the last year. Also, financing of the various levels in based on
judgmental decisions by financial analysts.

Formulae for calculating the requirements of different components of current

assets can be given as:

Raw material inventory

(Budgeted Requirement* cost o Raw Material per unit* Average inventory

Holding Period in months)/12

Finished Goods Inventory

(Total Cost of Sales* Average Inventory Holding Period in months)/12

Sundry Debtors

(Budgeted Credit Sales* Price of finished goods pr unit* Average debt

collection period in months)/12

64
 Sundry Creditors

(Budgeted Credit Purchase* Cost of Raw Material per unit* Average payable
period in months)/12

7.2 PREPARING CMA, APPLICATION & OTHER

SUPPORTING DOCUMENTS

At the time of fresh sanction, sanction for review with modifications in the
existing limits, and also for modification in any of the stipulated terms and
conditions, borrowers are required to furnish the following forms:

 Form No. І: This includes particulars of existing/proposed

limits/facilities/finance from: (a) each bank (b) each financial institution; for
working capital credit requirement. This form is applicable to all borrowers
irrespective of the size of the finance required.

 Form No. II: This includes operating statement with additional particulars
required under the Desirable Bank Finance method.

 Form No. III: This includes analysis of the balance sheet with additional
particulars required as per the bank norms.

 Form No. IV: This includes comparative statement of current assets and
current liabilities.

 Form No. V: This includes a Cash Budget with all the current year
projections.

65
 Form No. VI: This includes a report on financial indicators.

The above forms are combines to prepare Credit Monitoring

Arrangement (CMA). It is a comprehensive document consisting of the
company’s performance in the past 3 years along with estimations for the
current year (the year for which loan is required) and projections for the next
yea. This CMA is a consolidation of the Profit & Loss statement, Balance
sheet and Cash flow statement showing the sources and uses of funds. This
document is very descriptive, consisting of all the information about the levels
of current assets (inventory holdings, receivables, and other current assets),
current liabilities (creditors, statutory & other liabilities). Also, details are
given about the holding levels of current assets during the past 3 years and
peak level during the last year, so as to justify the estimated levels for the
current year. A complete bifurcation of sales, production, expenses on labour,
salary & allowances, administrative expenses are also given at the end, which
mainly includes the prices taken for raw material, power, fuel, stores &
maintenances and other expenses.

For obtaining the bank credit limits, working capital requirements are
estimated and on that basis with requisite supporting data, application is given
to the bank.

For the purpose of bank financing, minimum current ratio

requirement is 1.33:1. If the current ratio is lower than 1.33 then the
bank charges a higher rate of interest or assesses the bank borrowing at a
lower level, so as to achieve the current ratio of 1.33 (as by reducing the bank
borrowing, current liabilities get reduced, which is the denominator in the
calculation of current ratio, hence leading to a higher ratio).

66
 7.3 APPLICATION TO SINGLE BANK CONSORTIUM
OF BANKS
Now as per the amount of the bank borrowings required, the firm can apply
to a single bank or to a consortium of banks. A firm has to apply to a
consortium of Banks because as per the norms every bank has a limit up to
which they can provide funding to a specific industry, as investing money in a
single industry is much riskier than diversified investments. For all this, banks
have to adhere to the norms laid down for the limits of industry exposure
(investment) as well as company exposure. So, whenever the borrowing
requirements of a firm exceed the lending limits of a bank then it has to
approach a consortium of two or more banks. Once of the banks out of the
consortium are chosen as the lead bank by the company. Generally the bank
with the highest share in the sanctioned loan is chosen. The lead bank is
responsible for the primary appraisal of the loan application and then
circulates the appraisal to the member banks. The application along with
CMA & other supporting documents are sent to all the member banks of the
consortium which is then appraised and loan amount is accordingly
sanctioned.

7.4 APPRAISAL BY SINGLE BANK/LEAD BANK

After the bank/consortium of banks receive the application for funding of
working capital requirements, a comprehensive process o appraisal is carried out. In
case of a consortium of banks, the lead bank bears the responsibility of primary
appraisal and then passing the information to member banks. Borrowers are

67
categorized on the basis of their requirements in the following manner and
accordingly the process of appraisal is carried out.

CATERGORISATION OF BOROWERS
(i) For Non-SSI borrowers requiring working capital finance over Rs. 2 lacs and
up to Rs. 100 lacs from the banking system. From the banking system, for
such small-scale borrowers, a method of perceiving W/C credit
requirement is applied.

(ii)For Non-SSI borrowers requiring working capital finance over Rs. 100 lacs
and up to Rs. 500 lacs, and SSI borrowers requiring working capital
finance over Rs. 200 lacs but up to Rs.500 lacs from the banking system,
for this segment of borrowers are pre-supposed to have a better data base
of their operations and of financial health and, size of the limit to these
borrowers demands a high level of bank-exposure, a relatively detailed
analysis and supervision is proposed.

(iii) For all borrowers requiring working capital finance over Rs. 500 lacs and
up to Rs. 1000 lacs (for both SSI as well as Non-SSI borrowers) from the
banking system. The borrowers requiring the above said size o limit are
either corporate of likely to graduate to corporate-constitution in near
future and, as such, are believed to have a better data-base of their
operations. Moreover, the aggregate of the limits under the above said size
puts the bank’s exposure as a whole at a substantial level. Therefore, the

(iv) For all borrowers requiring working capital finance over Rs. 1000 lacs (for
both SSI and Non-SSI borrowers) from the banking system, the borrowers,
requiring this size of limit, (i) are in upper strata of the economy, (ii) are
predominantly corporate, and therefore, are statutorily required to maintain
various financial data base and statements as peer the requirements
prescribed under the relevant statutes/Acts apart from being statutorily
subjected to at least annual audits, (iii) have in-built systems to maintain
easily and promptly retrievable wide data-base to facilitate in depth

68
 analysis and understanding level of inventory and/or receivables but suffer
more from cash deficits arising from time to time. Further, because o the
mammoth size of the finance required by such borrowers, the banks are
more required to vigil their funds-managing ability to timely resource the
funds-availability as well as to conceive a proper funds-development.

7.5 SANCTION BY SINGLE BANK /MEMBER BANKS OF

CONSORTIUM
After the consortium meeting, the bank/member banks sanction the loan to the
applicant. Each of the member banks send a sanction letter to the borrower in which
the limit of the loan and the interest applicable as per the credit rating awarded by
that particular bank is mentioned. All the terms and conditions of the borrowing are
also mentioned in the sanction letter.

7.6 AGREEMENT & CREATION OF SECURITY

AFTER the sanction letter from the Banks is received by the borrower, an
agreement is prepared which includes all the terms & conditions of the deal, along
with the interest rate that will be charged on the borrowing. Also, other rules and
norms to which a borrower has to adhere to are mentioned in this agreement. An
agreement is a comprehensive document consisting of rights with the lending banks
and duties of the borrower to be fulfilled during the currency of the borrowing.
Generally banks have the right to enhance the rate of interest anytime during the
year. The borrower also has to offer some property, goods, debt-book, movables or
immovable for mortgage as securities to the bank. The properties offered as security
should be absolute property free from prior charges. In respect of security created by
way of hypothecation/pledge/mortgage, the borrower has to maintain a sufficient
quantity and market value of goods, book-debts. Movables and other assets and also
all immovable properties given as security at all times, to provide margins of
security required by the bank from time to time. In respect of credit opened or
guarantees or indemnities issued by the bank on behalf of the borrower, he has to
69
deposit sufficient cash or other security as margin money as stipulated by the bank.
Banks are given charge of the security on PARI PASSU basis which indicates that
all the banks in the consortium have first hand charge on the borrower’s assets kept
as security. It means that all the banks providing funds equal right on the property of
the borrower. In case of any default, they can claim the assets in proportion of the
outstanding to them by the borrower. Machineries of the borrower hypothecated and
charged to the bank are treated as movable property, and not as an immovable
property and it has to bear the name of the bank indicating that the said machineries
are hypothecated and charged to the bank.

7.7 DISBURSEMENT OF FUNDS

Indian Banks follow Line of credit System (LCS) for disbursement of working
capital funds. Under LCS, the borrower’s working capital credit requirement is
assessed at an outer limit i.e. the maximum limit which is flexible enough to be used
in one or more of the following forms as selected by the borrower in lieu of his
requirements from time to time. In other words, the Line of Credit is not a credit
facility per se, but, is an outer limit for total (funded and non-funded) working
capital finance. Within this outer limit, various types of working capital funded and
non-funded credit facilities with appropriate limits shall be made available to the
borrower.

7.8 INSPECTION BY BANK AND AUDITORS

The company has maintained proper records showing full particulars including
details and situation of fixed assets. The company has not granted any loan to
companies firms or other parties covered in the register maintained under section
301 of the companies act, 1956 the provision of clause 4 (iii) (b) to clause 4 (iii) (d)

70
of the companies. All the payments of loans are not dues. The BSL Ltd. is not
dealing in our training in shares, securities, debenture and other investment.

WORKING CAPITAL FINANCING AND

MANAGEMENT AT BSL LIMITED
The textile industry is one, which is characterized by high working capital
requirement. This arises principally on account of a long production-to-market cycle
time and high debtors arising out of strong competition. The ability to manage the
entire cycle from raw material procurement of receivables management holds the
key to better working capital management.

BSL used two modes for financing its working capital requirement:

 Tem loans

 Working capital loans

Term loans: loans taken from any financial institution and banks with monotonies
period of 2 years & in 32 outerly equal period installments.

Working capital loans: in forms of cash credit limits, packing credit limit & foreign
bill discounting limit etc. since the company is engaged in export so the packing
credit limit utilization is high. The packing credit limit is given for 180 days by
bank. The company also used gold card limit.

Letter of Credit (LC): this limit is commonly used to finance international trade. At
BSL Ltd., LC is used for domestic purchase/import o consumable stores and
spares/packing materials/coal and certain capital items on an ongoing basis for
modification/replacement of parts of the machinery.

71
8. WORKING CAPITAL EQUIEMENT AT BSL LIMITED

RAW MATERIAL STORAGE PERIOD

RAW MATEIAL CONSUMED/AVERAGE RAW MATEIAL

RAW MATEIAL CONSUMED = OPENING + PURCHASE – CLOSING

AVERAGE RAW MATERIAL = OPENING STOCK+CLOSING STOCK

8279.32/1239.19 = 6.68 TIMES

IN DAYS = 365/6.68 = 55 DAYS

WIP CONVERSION PERIOD

COST OF GOODS SOLD/AVERAGE WIP COST OF GOODS SOLD

= OPENING + PURCHASE – CLOSING

AVERAGE IP = OPENING + CLOSING / 2

12319/999.81=12.32 TIMES

IN DAYS = 365/12.32 = 30 DAYS

FINISHED GOODS STORAGE PEIOD

COST OF GOODS SOLD/AVERAGE FINISHED GOODS

COST OF GOODS SOLD = OPENING + PURCHASE – CLOSING

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AVERAGE INISHED GOODS = OPENING + CLOSING / 2

12319/1788.1 = 6.9 TIMES

IN DAYS = 365 / 6.9 = 53 DAYS

DEBTORS COLLECTION PERIOD

= CREDIT SALES / AVERAGE DEBTORS

AVERAGE DEBTORS = OPENING (DEBTORS + B/R) + CLOSING (DEBTORS

+ B/R) / 2

18133.98 / 2654.48 = 6.83 TIMES

IN DAYS = 365 / 6.83 = 54 DAYS

CREDITORS PAYMENT PERIOD

= CREDIT PURCHASE / AVERAGE CREDITORS

AVEAGE CEDITORS = OPENING (CEDITORS + B/P) + CLOSING (CREDITOS

+ B/P) / 2

7956.54 / 849.195 = 9.37 TIMES

IN DAYS = 365 / 9.37 = 39 DAYS

OPERATING CYCLE DAY =

55 + 30 + 53+ 54 – 39 = 153

NO. OF OPERATION = 365 / 153 = 2.38

73
WORKING CAPITAL REQUIREMENT =
COST OF GOODS SOLD / NO. OF OPERATION

= 18133.98 / 2.38 = 7619.32 CRORE RS.

9. CEDIT RATINGS OF THE COMPANY

Another reason for such a low cost o funds is the rating enjoyed by the company.
BSL Limited enjoys the highest rating for both short-term and long term loans.
Credit rating is done by an external agency, CARE (Credit Analysis Research
Egencey) has awarded them the rating BBB – minus for working capital loans.
Again the company was consistent in achieving these grading from CARE for the
last one year. One of the most important challenges facing the management is to
keep these ratings at the highest level.

10. RESULTS & CONCLUSIONS

From the analysis of company’s performance in the past few years it is clear that
BSL Limited has adopted very innovative techniques for the financing and
management of working capital. The company has been able to maintain a Current
Ratio. Also, with the help of strict credit policies they have been able to bring down
the receivables collection period. The inventory turnover period has increased by
better management. Working capital management helps predict day operation of
business. Mismanagement or adequate management becomes a leading cause of
business failure or success.

74
COMPANY’S VALUE

 Leadership: The courage to shape a better future.

 Passion: to build BSL in global Market.

 Integrity: A world class textile solution.

 Accountability If it is to be, it’s up to me.

 Innovation: Production of new fabric.

 Quality: Higher’s standard of quality in today’s competitive environment.

11. SWOT ANALYSIS

The overall evaluation of a company’s strength, weaknesses, opportunities, and

threat’s is called SWOT ANALYSIS. It involves monitoring the external and
internal marketing enviorment.To identifies the companies peripheral opportunities
and threats as well as its in house strength’s and weakness.

The company’s needs to equilibrium strengths and weakness against opportunities

and threats.

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Is the company an overall strong competitive position? If any company analyzes his
SWOT, that it can continue to pursue its current business or corporate level strategy,
profitable and company can also turn weakness into strength n threat in to the
opportunities.

9 .1 A SWOT ANALYSIS IS THE KEY TO A SUCESSFUL

INDUSTRY
STRENGTHS:-

 Availability of world class technology

 ISO 9002 certification for outstanding export performance

 Strategic location for raw material, Logistic activities

 100% self Reliability in energy consumption

 Cost competitiveness in variable expenses

WEAKENESSES:-

 Brand BSL <still to be endorsed in Global Market>

 Product range needs to be expanded to match the growing needs

 A dependency factor of specific customer & markets still exists

 Agency business still accounts a bulk of total sales.

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OPPORTUNITIES:-

 Large untapped potential exists in the global market

 Management focus for a more diverse product range for silk sector & new
fabric in fashion

 Growing domestic textile industries

THTREATS:-

 Scarcity o semi skilled labour is a problem area

 Small players in the market lead to price wars

 Competition tuff in domestic market

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12. BIBLOGRAPHY

 www.bslltd.com

 www.injbhilwara.com

 www.blackwellpublishing.com/books

 www.financialexpress.com

 SN Maheshwari [MANAGEMENT ACCOUNTING & FINANCIAL

MANAGEMENT]

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