Working Capital Financing and Credit Appraisal

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I. EXECUTIVE SUMMARY

The project brings out various aspects of working capital management and the means to get it financed from banks. It starts with explanation of the concept of working capital, description of working capital cycle, management and financing of working capital. This is supplemented by a brief explanation of the working capital financing of M/s Paras Organics Private Limited. It should be noted that business transactions are generally carried on credit with a number of days elapsing subsequent to the sale being affected for realization of sale proceeds. While part of the raw materials may be purchased on credit, the business would still need to pay its employees, meet manufacturing and selling expenses such as wages, power, suppliers, transportation and communication and the balance of its raw material purchases. Working capital refers to the source of financing required by business on a continual basis for meeting these needs. The faster a business expands, the more cash it will need for working capital investment. The cheapest and best sources of cash exist as working capital right within the business. Sound management of working capital will generate cash which will improve profits and reduce risks. The cost of providing credit to customers and holding inventories can represent substantial proportion of the total profits of a firm. The investment in raw materials, work-in-progress, finished goods and receivables often varies a great deal during the course of the year. Typically, current assets are supported by a combination of both short-term and long-term sources. Hence, a prudent financial planning and forecasting must be done with great acumen.

II. OBJECTIVE AND METHODOLOGY

II.A. OBJECTIVE:
* To study the concept of working capital and the means of management of working capital including cash, inventory and receivables.

* To understand the process of assessment of working capital requirement by banks and various modes available for working capital financing.

II.B. METHODOLOGY:
* The concept of working capital management was studied from sources like books and internet. The books referred to were Financial Management by Dr. P.C. Tulsian, Banking and Insurance- Law and Practice by ICSI and Total Management by Ratios by Hrishikesh Bhattacharya.

* The information regarding various working capital financing means and guidelines given by RBI for the same has been taken from www.rbi.org.in

* The data used in the project is secondary data. A sanctioned proposal of working capital financing for M/s Paras Organics Pvt. Ltd. by Bank of India, Nerul, was studied.

III. INTRODUCTION TO WORKING CAPITAL

III.A. WORKING CAPITAL MEANING AND SIGNIFICANCE:
Working capital refers to funds required to be invested in the business for a short period usually up to one year. It is also known as short-term capital or circulating capital. Working capital is required to meet day to day operating expenses and for holding stocks of raw materials, spare parts, consumables, work in progress and finished goods and book debts including debtors’ balances and bills receivable. Basically, working capital is needed due to the existence of operating cycle. Operating cycle is the duration of time between acquisition of supplies and the collection of cash from receivables. The operating cycle in a manufacturing firm is shown below:

Cash

Raw Materials
Receivables

Finished Goods

III.B. CONCEPTS OF WORKING CAPITAL:
There are mainly two concepts of working capital, namely gross concept and net concept. * Gross Working Capital:
It refers to the firm’s investment in current assets. Current assets refer to the assets which are held for their conversion into cash within an operating cycle, i.e., time duration between the conversion of cash into inventory items (raw...
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