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Measures liquidity

Gross Working Capital= Current Assets Net Working Capital= Current Assets- Current Liabilities

Current assets are the assets which can be converted into cash within one
year and include cash, short-term securities, debtors, bills receivable and inventory.

Current liabilities (CL) are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses.

Current Assets Cash Other short-term financial investments Accounts receivable Inventories Total current assets Rs.26285.89 155962.85 29180.15 16957.65 173214.88 63028.27 Rs.527089.87 Rs.291414.81 Rs.74651.53 30125.67 249097.79

Current Liabilities Current portion of long-term debt Accounts payable Income tax provisions Dividend Provisions Other current liabilities Total current liabilities

Net working capital (current assets - current liabilities) = 527089.87 - 291414.81 = Rs.235675.06 crores

Permanent or fixed working capital

A minimum level of current assets, which is continuously required by a firm to carry on its business operations, is referred to as permanent or fixed working capital.

Fluctuating or variable working capital

The extra working capital needed to support the changing

production and sales activities of the firm is referred to as fluctuating or variable working capital.

Nature of business Market and demand Technology and manufacturing policy Credit policy Suppliers credit Operating efficiency Availability of Raw Material Inflation

Operating cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases:
Acquisition of resources such as raw material, labour, power and fuel

Manufacture of the product which includes conversion of raw

material into work-in-progress into finished goods.

Sale of the product either for cash or on credit. Credit sales create

account receivable for collection.

Inventory conversion period is the total time needed for

producing and selling the product. Typically, it includes:
raw material conversion period (RMCP)

work-in-process conversion period (WIPCP)

finished goods conversion period (FGCP)

The debtors conversion period is the time required to collect the

outstanding amount from the customers.

Creditors or payables deferral period (CDP) is the length of time the firm is able to defer payments on various resource purchases.

Gross operating cycle (GOC)

The total of inventory conversion period and debtors conversion period is referred to as gross operating cycle (GOC).

Net operating cycle (NOC)

NOC is the difference between GOC and CDP.

Length of Operating Cycle

Cash Cash Receivables Cash Receivables

Raw Materia



Finished Goods



Semi Finished Goods

Own funds
Trade Credit, Outstanding Expenses, advances from customers Bank Finance
Cash Credit
Overdraft Shot term Loans

Bills Discounting, Factoring & Forfaiting Money Market Instruments: Call Money, Notice Money, Commercial Paper & Certificate of Deposits

Cash Credit: have limits, generally with


Overdraft: With current Account

Shot term Loans, Demand Loans:

In 1974, a committee headed by Ex Chairman of PNB- Mr.

P. L. Tandon for improvement in cash credit system. Suggestions
Three methods of MPBF.
Inventory holding period of 15 major industries was proposed Classification guidelines for CA & CL

Bifurcation of limit into cash credit & demand loan component

Calculate Maximum Permissible Bank Finance according to three methods of Tandon Committee (Core Current Assets are of Rs 95)
Current Liabilities Creditors Amount 100 Current Assets Raw Material Amount 200

Other Current Liabilities

Bank Borrowing


Stock in Process
Finished Goods


Other Current Assets 250

10 370

Companys Contribution


25% of CA + all core CA should be from long term source

At least 25% of 25% of CA should Working Capital be from long term Gap (CA- CL source excluding bank Lending) should be from long term source


0.75 (CA-OCL)

0.75 CA-O CL


OCL means current liabilities excluding bank finance

In April 1979, Committee under Chairmanship of Mr. K B Chore for gap between
sanctioned limit and utilization.


Review of limits once in a year No Bifurcation of cash credit accounts Separate Limit for peak level and non peak level Excess/ under utilization (more than 10% on either side) considered as defective planning. Penal interest of 1%

No frequent sanction of Ad Hoc or temporary limits 2nd Method of MPBF compulsory for companys with limit more than Rs 50 lakhs Encourage Bill Finance

Cash Budget method

(Reason: Based on procurement and cash inflow)

Seasonal Industries (Sugar/ Rice Mills/Textiles/Tea/Tobacco/Fertilizers) Contractors & Real Estate Developers Educational Institutions

Statement showing forecast of cash receipts, cash payments and net cash balance over a period of time
Months-> Cash Receipts Cash Payments Surplus/deficit Cash credit
Peak deficit is financed and drawings regulated by monthly budgets

1 2 3 4 5 6 7 8 9 10 11 12

Advantages: Suitable for seasonal industries, contractors, software exporters etc. Limitations: Will not reflect changes in various current assets and liabilities. Will it give a clue whether a company is earning profit or not. Funds flow statement is required to detect any diversion of funds.

For aggregate WC limit up to 200 lakhs (Currently Rs 500 lakhs), Tandon

Committee methods will not be implemented but Working Capital requirement will be 20% of the projected annual turnover. SSI units have

to bring 5% of margin money

Other SSI units have Tandon Committee 1st Method will be implemented. Single Financial Agency for WC & Term loan for SSI. Application should be processed in 15 days (up to 25000) and 8 weeks (for more than 25000)

After 1997, compulsiveness of MPBF have been

withdrawn Banks can decide modalities to assess Bank Finance limits WC requirements upto 500 lakhs, Nayak Committee

Methods can be followed and above that cash budget

methods can be followed.

There is no objection of following of MPBF Method

Working Capital Operating Cycle Tandon Committee: MPBF Chore Committee: Cash Budget method for seasonal industries Nayak Committee on SSI Lending: Turnover Method Kannan Committee: Flexibility of Methods