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SOURCES OF WORKING CAPITAL by
DR.K.P.Malathi Shiri
LOMG TERM SOURCES
 Issue of Equity Shares
 Issue of Preference Shares
 Issue of Debentures or Bonds
 Retained Earnings...
BENEFITS OF FUNDING BY EQUITY ISSUE
 Permanent source of financing
 Increases the flexibility of the firm
 Additional e...
TYPES OF PREFERENCE SHARES
 Cumulative/ Non-Cumulative Preference
Shares
 Redeemable/Non-redeemable Preference
Shares
 ...
ADVANTAGES OF PREFERENCE ISSUE
 Does not affect the market perception of the
firm
 Lends a leveraging advantage ( it is ...
TYPES OF DEBENTURES
 Convertible/ Non- Convertible Debentures
 Partially Convertible – Ratio and time of
conversion fixe...
MERITS OF DEBT FINANCING
 Cost of debt is cheaper than cost of equity or
preference capital
 It is treated as an expense...
SHORT TERM SOURCES
 INTERNAL SOURCES
 Depreciation Fund
 Provision for Taxation( time lag between
creating the provisio...
SHORT TERM SOURCES
 EXTERNAL SOURCES
 TRADE CREDIT – 15 to 90 days credit
 Based on an “Open Account”, without any
coll...
EXTERNAL SOURCES- CONTD…
 COMMERCIAL PAPER (CP)- It is a “usance
Promissory Note, issued by the firm and
approved by the ...
EIGIBILITY CRITERIA FOR CP
 Tangible net worth of not less than Rs 4 crores
as per the last Balance Sheet
 Working Capit...
OTHER CONDITIONS FOR CP
 CP should not be issued for a period less
than 15 days from the date of issue.
 No grace period...
EXTERNAL SOURCES- CONTD….
 ADVANCES FROM CUSTOMERS – cost
free source of working capital – (eg) down
payments in case of ...
CONTD…..
 Bills Discounting
 Bills Acceptance
 Line of Credit – bank commitment to lend on
demand with maximum limit sp...
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Sources of working capital Slide 1 Sources of working capital Slide 2 Sources of working capital Slide 3 Sources of working capital Slide 4 Sources of working capital Slide 5 Sources of working capital Slide 6 Sources of working capital Slide 7 Sources of working capital Slide 8 Sources of working capital Slide 9 Sources of working capital Slide 10 Sources of working capital Slide 11 Sources of working capital Slide 12 Sources of working capital Slide 13 Sources of working capital Slide 14
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Sources of working capital

  1. 1. SOURCES OF WORKING CAPITAL by DR.K.P.Malathi Shiri
  2. 2. LOMG TERM SOURCES  Issue of Equity Shares  Issue of Preference Shares  Issue of Debentures or Bonds  Retained Earnings  Loans from Financial Institutions
  3. 3. BENEFITS OF FUNDING BY EQUITY ISSUE  Permanent source of financing  Increases the flexibility of the firm  Additional equity capital can be raised by making a rights issue  No mandatory payments for equity shareholders
  4. 4. TYPES OF PREFERENCE SHARES  Cumulative/ Non-Cumulative Preference Shares  Redeemable/Non-redeemable Preference Shares  Convertible/Non-Convertible Preference Shares
  5. 5. ADVANTAGES OF PREFERENCE ISSUE  Does not affect the market perception of the firm  Lends a leveraging advantage ( it is the result of employment of an asset or funds to pay fixed costs or return)  Managerial control not diluted  Redemption of preference shares after expiry of the period
  6. 6. TYPES OF DEBENTURES  Convertible/ Non- Convertible Debentures  Partially Convertible – Ratio and time of conversion fixed by the issuer  Secured/ Unsecured Debentures  INDENTURE – or Debenture Trust Deed – a legal agreement between the Issuing Company and Debenture Trustee/Debenture holders
  7. 7. MERITS OF DEBT FINANCING  Cost of debt is cheaper than cost of equity or preference capital  It is treated as an expense and passes on the benefit of tax  Investors expect a lower return on debenture investment  Does not dilute managerial control  During inflation, debenture issue is ideal  DRAWBACK – is the financial risk that is linked with the firm
  8. 8. SHORT TERM SOURCES  INTERNAL SOURCES  Depreciation Fund  Provision for Taxation( time lag between creating the provision and actual payment of tax)  Outstanding Expenses – ability to “play float” by postponing expenses
  9. 9. SHORT TERM SOURCES  EXTERNAL SOURCES  TRADE CREDIT – 15 to 90 days credit  Based on an “Open Account”, without any collateral security  Interest charged is reasonable  In working capital- readily available; flexible means of financing; easy accessibility for small firms even when the economy has a tight circulation of funds
  10. 10. EXTERNAL SOURCES- CONTD…  COMMERCIAL PAPER (CP)- It is a “usance Promissory Note, issued by the firm and approved by the RBI  Negotiable by endorsement and delivery  Issued at a discount on face value  Certified by the banker after verifying the signature of the executors  Credit period- few days to a few months  Normally issued in multiples of 5 lacs
  11. 11. EIGIBILITY CRITERIA FOR CP  Tangible net worth of not less than Rs 4 crores as per the last Balance Sheet  Working Capital limit not less than Rs 4 crores  Current Ratio should not be less than 1.33 times  Such rating should not be more than 2 months old from the date of issue of the CP  Financing/Banking company to categorise the borrowing account of the firm as “Standard Assets”.
  12. 12. OTHER CONDITIONS FOR CP  CP should not be issued for a period less than 15 days from the date of issue.  No grace period is allowed for CPs  Maximum maturity period revised by RBI from 6 months to less than1 year period from date of issue of CP.  Lack of several investors due to absence of secondary market
  13. 13. EXTERNAL SOURCES- CONTD….  ADVANCES FROM CUSTOMERS – cost free source of working capital – (eg) down payments in case of construction business  BANK CREDIT  Cash Credit – against security of inventory on a continual basis  Bank Overdraft – right to recall at short notice by banks
  14. 14. CONTD…..  Bills Discounting  Bills Acceptance  Line of Credit – bank commitment to lend on demand with maximum limit specification  Letter of Credit  Bank Guarantee
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Different sources of working capital

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