SOURCES OF WORKING CAPITAL FINANCING

The sources for working capital can either be long term, short term or even spontaneous. Spontaneous
working capital are majorly derived from trade credit including notes payable and bills payable while short
term working capital sources include dividend or tax provisions, cash credit, public deposits, trade
deposits, short-term loans, bills discounting, inter-corporate loans and also commercial paper.

For the long-term, working capital sources include long-term loans, provision for depreciation, retained
profits, debentures and share capital. These are major working capital sources for organizations based on
their requirements.

SPONTANEOUS SOURCES

TRADE CREDITORS

SUNDRY CREDITORS

BILLS PAYABLE

ACCRUED EXPENSES

SHORT TERM SOURCES

BANK OVERDRAFT

PUBLIC DEPOSITS

BILL DISCOUNTING

FACTORING

COMMERCIAL PAPERS

LONG TERM SOURCES

SHARE CAPITAL

BANK LOANS

RETAINED EARNINGS/PROFITS

Trade Credit:
Just as the companies sell goods on credit, they also buy raw materials,
components and other goods on credit from their suppliers. Thus,
outstanding amounts payable to the suppliers i.e., trade creditors for credit
purchases are regarded as sources of finance. Generally, suppliers grant
credit to their clients for a period of 3 to 6 months.

Thus, they provide, in a way, short- term finance to the purchasing

company. As a matter of fact, availability of this type of finance largely
depends upon the volume of business. More the volume of business more
will be the availability of this type of finance and vice versa.

BILLS PAYABLE

The term "bills payable" is often used interchangeably with the term "accounts payable." As such, a

company will treat bills payable in the same manner as it treats accounts payable -- obligations that will

become due within one year. The account for bills payable includes purchases a company makes on credit

and money a company borrows that must be repaid within one year.

BANK OVERDRAFT

Overdraft is a financial instrument in which the money can still be withdrawn from the

current or savings account, even if the account balance goes below zero. It is a type of

extension of monetary limit offered by banks and that money is said to be ‘overdrawn’.

An authorized overdraft limit is assigned for each customer depending on their

relationship with the bank. The customer can withdraw money up till the assigned limit.

Banks do charge interest rate on the money withdrawn in form of overdraft.

FACTORING

Factoring is a financial transaction and a type of debtor finance in which a business sells its

accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business

will sometimes factor its receivable assets to meet its present and immediate cash needs.

COMMERCIAL PAPERS

Commercial paper is an unsecured, short-term debt instrument issued by a

corporation, typically for the financing of accounts payable and inventories and
meeting short-term liabilities. Maturities on commercial paper rarely range
longer than 270 days. Commercial paper is usually issued at a discount from
face value and reflects prevailing market interest rates.
DIMENSIONS OF WORKING CAPITAL

Dimension I: It is concerned with formulation of policies relating to risk, profitability and

liquidity.

Dimension II: It is concerned with the decision about the composition and level of current
assets.

Dimension III: It is concerned with the decision about the composition and level of current
liabilities.

CASH MANAGEMENT
Cash management is the process of collecting and managing cash flows.
Cash management can be important for both individuals and companies. In
business, it is a key component of a company's financial stability. For
individuals, cash is also essential for financial stability while also usually
considered as part of a total wealth portfolio.

Individuals and businesses have a wide range of offerings available across

the financial marketplace to help with all types of cash management needs.
Banks are typically a primary financial service provider for the custody of cash
assets. There are also many different cash management solutions for
individuals and businesses seeking to obtain the best return on cash assets or
the most efficient use of cash comprehensively.

INVENTORY MANAGEMENT
Inventory management refers to the process of ordering, storing, and using a
company's inventory. These include the management of raw materials,
components, and finished products, as well as warehousing and processing
such items.

For companies with complex supply chains and manufacturing processes,

balancing the risks of inventory gluts and shortages is especially difficult. To
achieve these balances, firms have developed two major methods for
inventory management: just-in-time and materials requirement planning: just-
in-time (JIT) and materials requirement planning (MRP).

 Inventory management refers to the process of ordering, storing, and

using a company's inventory. These include the management of raw
materials, components, and finished products as well as warehousing
and processing such items.
 For companies with complex supply chains and manufacturing
processes, balancing the risks of inventory gluts and shortages is
especially difficult.
 To achieve these balances, firms have developed two major methods
for inventory management: just-in-time and materials requirement
planning: just-in-time (JIT) and materials requirement planning (MRP).

Management of receivables

Receivables are amounts owed to the company by the customers to who company sell
goods or services in the normal course of business. The main purpose of managing
receivables is to meet competition and to increase sales and profits.

Following are the objectives of receivables management which will help us to understand the
purpose of receivables:

1. To optimize the amount of sales

2. To minimize cost of credit
3. To optimize investment in receivables.
4. To increase credit sales.

Therefore, the main objective of receivable management is to create a balance between

profitability and cost.
FORMS OF DIVIDEND
1. Cash Dividend: It is one of the most common types of dividend paid in cash. The
shareholders announce the amount to be disbursed among the shareholder on the “date
of declaration.” Then on the “date of record”, the amount is assigned to the
shareholders and finally, the payments are made on the “date of payment”. The
companies should have an adequate retained earnings and enough cash balance to pay
the shareholders in cash.
2. Scrip Dividend: Under this form, a company issues the transferable promissory note
to the shareholders, wherein it confirms the payment of dividend on the future date.A
scrip dividend has shorter maturity periods and may or may not bear any interest.
These types of dividend are issued when a company does not have enough liquidity
and require some time to convert its current assets into cash.
3. Bond Dividend: The Bond Dividends are similar to the scrip dividends, but the only
difference is that they carry longer maturity period and bears interest.
4. Stock Dividend/ Bonus Shares: These types of dividend are issued when a company
lacks operating cash, but still issues, the common stock to the shareholders to keep
them happy.The shareholders get the additional shares in proportion to the shares
already held by them and don’t have to pay extra for these bonus shares. Despite an
increase in the number of outstanding shares of the firm, the issue of bonus shares has
a favorable psychological effect on the investors.
5. Property Dividend: These dividends are paid in the form of a property rather than in
cash. In case, a company lacks the operating cash; then non-monetary dividends are
paid to the investors.The property dividends can be in any form: inventory, asset,
vehicle, real estate, etc. The companies record the property given as a dividend at a
fair market value, as it may vary from the book value and then record the difference as
a gain or loss.
6. Liquidating Dividend: When the board of directors decides to pay back the original
capital contributed by the equity shareholders as dividends, is called as a liquidating
dividend. These are usually paid at the time of winding up of the operations of the
firm or at the time of final closure.

Thus, it is found out that usually the dividends are paid in cash, but however in certain
situations, there could be the other forms of dividend as explained above.

What are the areas covered by receivables management?

Following are the areas covered by receivables management:

- Credit Analysis
- Credit Terms
- Financing of Receivables
- Credit Collection
- Monitoring of Receivables