Working Capital Management                          Roshankumar S Pimpalkarroshankumar.2007@rediffmail.com
WORKING CAPITAL MANAGEMENT PART 5Financing of Working CapitalAfter determining the amount of working capital required, the...
Factoring: The concept of factoring has already been discussed in part 4.Working Capital Finance from Banks: Banks in Indi...
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Working capital management 5

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Transcript of "Working capital management 5"

  1. 1. Working Capital Management Roshankumar S Pimpalkarroshankumar.2007@rediffmail.com
  2. 2. WORKING CAPITAL MANAGEMENT PART 5Financing of Working CapitalAfter determining the amount of working capital required, the next step is to arrangefunds. Broadly speaking, the working capital finance may be classified between thetwo categories: Spontaneous sources Negotiable sourcesThe Spontaneous sources of finance are those which naturally arise in the course ofbusiness operation.For example: Trade credit, credit from employees, credit from suppliers, accruedexpenses etc.Negotiable sources of finance are those which have to be specifically negotiated withlendersFor example: Loan from commercial banks, financial institutions, general public etc.Sources of FinanceInter-corporate Loans and Deposits: organizations having surplus funds invest forshort-term period with other organizations. The rate of interest will be higher than thebank rate of interest and depending on financial soundness of the borrowercompany.Commercial Paper (CP): This is an instrument that enables highly rated corporateborrowers for short-term borrowings and provides an additional financial instrumentto investors with a freely negotiable interest rate. The maturity period ranges fromminimum 7 days to less than 1 year. However this source of borrowing is notavailable for small businesses.Funds Generated from Operation: Funds generated from operation increase theworking capital amount by equivalent amount. The two main components of fundsgenerated from operation are profit and depreciation.Public Deposit: Deposit from the public is one of the important source of financeparticularly for well established big companies with huge capital base for short andmedium term.Bill Discounting: In the process of bill discounting, the supplier of goods draws a billof exchange with direction to the buyer to pay a certain amount of money after acertain period, and gets its acceptance from the buyer or drawee of bill. This bill maybe further endorsed to bank or other party.roshankumar.2007@rediffmail.com
  3. 3. Factoring: The concept of factoring has already been discussed in part 4.Working Capital Finance from Banks: Banks in India today constitute the majorsuppliers of working capital credit to any business activity. Recently, some termlending financial institutions have also announced schemes for working capitalfinancing. The two committees viz., Tandon Committee and Chore Committee haveevolved definite guidelines and parameters in working capital financing.With this we come to conclusion of this series of Working Capital Management. Inthe five parts I have tried to cover as much as possible about working capitalmanagement, but the concept is very large as it is one of the major contributor forprofitability and growth of business.roshankumar.2007@rediffmail.com

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