Sie sind auf Seite 1von 31


Capital required for a business can be classified under two main categories via, y Fixed capital y Working capital Every business needs funds for two purposes for its establishment and to carry out its day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short term purposes for the purposes of raw material, payment of wages and other day to day expenses etc. These funds are known as working capital. In simple words, working capital refers to that part of the firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

Concept of Working Capital

There are two concept of working capital: y Gross working capital y Net working capital The gross working capital is the invested in the total current assets of the enterprise current assets are those assets which can convert in to cash within a short period normally one accounting year.

CHMM College Chavarcode

Page 1


Constituents of Current Assets

 Cash in hand and cash at bank.  Bills receivable  Sundry debtors  Short term loans and advances  Inventories and stock as: o Raw material o Work in progress o Stores and spares o Finished goods

o Temporary investment of surplus fund o Prepaid expenses o Accrued incomes o Marketable securities

In narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over liability, or, say:


Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary

CHMM College Chavarcode

Page 2


course of business within a short period of normally one accounting year out of the current assets or the income business

Constituents of Current Liability

 Accrued or outstanding expenses  Short term loans, advances and deposits  Dividend payable  Bank overdraft  Provision for taxation, if it does not amt. to app. Of profit  Bills payable  Sundry creditors

The gross working capital concept is financial or going concern concept where as net working capital is accounting concepts have their own merits.

The gross concept is sometimes preferred to the concept working capital for the following reasons:

y It enables the enterprise to provide correct amount of working capital at the correct time. y Every management is more interested in total current assets with which it has to operate then the source from where it is made available.
CHMM College Chavarcode Page 3


y It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. y This concept is also useful in determining the rate of return on investments in working capital concepts, however, is also important for following reasons:

1. It is qualitative concept, which indicates the firms ability to meet its operating expenses. 2. It indicates the margin of production available to the short term creditors. 3. It is an indicator of the financial soundness of enterprises. 4. It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.

Classification of Working Capital

Working capital may be classified in two ways:

y On the basis of concept y On the basis of time

On the basis of concept working capital can be classified as gross working capital and net working capital. On the basis of time, working capital may be classified as:

 Permanent or fixed working capital

CHMM College Chavarcode Page 4


 Temporary or variable working capital

CHMM College Chavarcode

Page 5


Permanent or Fixed Working Capital

Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work in process, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets.

Temporary or Variable Working Capital

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demand and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.

CHMM College Chavarcode

Page 6

A research work will be successful, only with a sound research design. The research design for the purpose of the study is analytical in nature. The major purpose of analytical research is to analyze the state affaires as it exists at present. Analytical research includes survey and in depth plan calls for gathering primary and secondary data.

Methods of Data Collection

In this research the collection of data is from various sources and they are two types. 1. Primary data 2. Secondary data Primary data: Primary data collection was mainly done through direct interview and telephone contacts. Secondary data: Secondary data was collected from company records, internet and books.

Nature of Data
Information for this work has been collected from previous records viz profit and loss and balance sheet of the past five years. Both primary and secondary data have been used for the study.

Tools of Data Analysis

CHMM College Chavarcode

Page 7


Tools used for the purpose of the study are ratio analysis and statement of changes in working capital. The tables and charts are used for the purpose of the analysis and interpretation. To define any research problem and give a suitable solution for the problem, a sound research plan is inevitable. Research methodology underlines the various steps involved by the researcher in systematically solving the problem with the objective of determining various facts.

Presentation of Data
Tables and charts are used to present the data.


CHMM College Chavarcode

Page 8


Coconut palm is one of the most valuable plant to man. In sanskrit the cocunut palm is called kalpa vriksha which regularly translatted means free of life in India. It provides livelihood to about 10million people through various activities from its cultivation to processing for product all the parts of cocunut tree can be put to useful purpose.The root, the trunk,the wood,leaves the blossom and all the parts of the nut.

Two major classes of coconut palm are typically reorganised on the basis of stature tall and dwarf. The ones most commonly planted for commercial are the tall varieties,which are slow to meture and first flower six to ten years after planting. They produse medium to ten years after planting. They produce medium to large size nuts and have life span of sixty to seventy years. The dwarf variety may have orginated mutation of tall types. The dwarf variety may grow to a height of 250to 35 and begin flowers after three years when they are only about three feet tall. Their life span is only about 30years. India is the largest third coconut producing country in the world. Country Indonesia Philippians India Brazil Srilanka Thailand Mexico Vietnam Malaysia
CHMM College Chavarcode

Production 16300000 14500000 9500000 3303830 1950000 1500000 959000 940000 710000
Page 9


Coconut Industry In India

Coconut palm are grown widely in the coastal tracks at the country. The coconut economy at India is in a convenient status. India accounts for 22.34% of the worlds coconut production and is one of the major players in the worlds coconut trade currently the crop is grown in 1.91million hectors with an annual production of nearly 13000 million nuts. Copra processing, coconut oil extraction and coir manufacturing are the traditional coconut based industries in the country. The price of coconut in the country is depend on the prevailing price at coconut oil which is charaterised by recurring violent flactuactions,The behaviour of coconut oil price relatively depend on overall supply of oils and facts in the country.the flactvation in the price of coconut oil simotaniousily reflects on the price of coconut . The voletile price situation ends in the negligence of coconut grands,leading to atttacts of pests and dieseases and low prodativity of the of ways ,promating cost effecctive farming system. Product diversification and valu addition play crucial role in the stabilisation of the coconut oil driven domest market and its essential for re orinting and engineering the Indian coconut industry cost effective and globally competative. Coconut development has been playingvital role in promoting viable concerd ccoconut based farming system, on farm processing and product devolopment.The production and marketing of value added product have started attracting commecial interest and the sitivation bought rejointation in the sector. The market promotional measures undertaken. The market promotional measures undertaken in per suit of the popularization of health benefit of coconut and tender coconut oil water have attributed a stimulating effect in less dependency of coconut oil driven coconut economy. There has been a well defined network in the country to undertake R&D of coconut. The state agriculture universities, CAR institutes, agricultural horticultural department of state.Organisations likes NAFED, KERAFED etc... And private institutions contribute to the pursuit of the research and development process of coconut in the country

CHMM College Chavarcode

Page 10


Strength of Indian Coconut Industry

y y One of the leading coconut producers of the world.( 13 billons nut per annum) Coconut area distributed in it state and three union territories under different agro climatic condition y y y 3000 years tertian in coconut cultivation Premier coir manufacturing country in the world Producer of best grade milling copra in the world yielding high grade coconut oil non for its aroma and flavors. y y Large number of farmers co operative societies in primary processing and marketing. Government agencies such as KERAFED, state trading corporation, Kerala state marketing federation and Karnataka state marketing federation in manufacturing of branded coconut oil in small packs. y y Wide range of coconut products both edible and non edible available for export. Technical known how and trained manpower for the manufacture of various coconut based products. y y Good number of cultivars having specific not characteristics. Ava liability of research supports by reputed research organization such CSIR, ICAR, DRDO.

Coconut Products of India

A large no: of coconut products are manufactured in I the country which have both domestic and export market Vinegar and soft drinks are manufactured in the country from coconut water is another product which is manufactured and marketed successfully

CHMM College Chavarcode

Page 11


1. Tender coconut water 2. COPRA 3. Coconut oil 4. Coconut cake 5. Coconut toddy 6. Coconut shell based product 7. Coconut wood based product

Coconut Oil
Coconut oil makes up about 20% of all vegetable oil used in the world. Copra, the dried kernel is the chief commercial product from coconut which is mainly used for oil extraction. Coconut oil is made from fully dried copra having maximum moisture content at 6% for extraction of oil from copra The common method still prevailing in our country is done through by using rotary chucks. But the efficient system of extraction of oil is by the use of expellers. Coconut oil is an important cooking medium in southern parts of the country especially in Kerala state. Besides the oil has varied industrial application. It is used in manufacture of toilet soaps, laundry soaps, surface active detergent, hair tonics, cosmetics etc.It is used throughout the country as hair oil as it helps growth of hair. its massage oil it has cooling effect on the body. Owing to these qualities coconut oil has potential market in the country. Since the price of coconut oil in the international market is very much lower than the domestic price. The quality and attractiveness of consumers packs are important factor to complicate in the world market. While the demand for coconut oil for cooking purpose is elastic. It as hair oil is inelastic. Coconut oil is marketed in bulk as well as in packs ranging from sachets containing 5ml to 15kg tins. The branded coconut oil in small packs is mainly marketed as hair and body oils. There Aare several brands known for their superior grade oil which has export market throughout the world.india has unbeatable quality advantage in this sector. Refined coconut
CHMM College Chavarcode Page 12


oil is also manufactured in the country for industrial uses. Refined coconut oil is mainly used in the manufacture of biscuits, chocolates and other confectionary items , ice creams, pharmaceuticals products and vastly paints. Generally, filtred coconut oil is used for cooking and toiletry purposes.

Virgin Coconut Oil

Virgin coconut oil is also made in the country from the milk extrcteded from raw kernel this is done on a small scale by traditional method which is now partially mechanized or on a large scale by adopting you processing technology. Coconut milk is terminated and then by mechanical process, water is separated from oil with no heating or no application at sunlight or drier is done for the process. The virgin coconut oil is free from trans fatty acid, high in medium chain fats[MCFA] known as larvic acid, which is identical to special group at fats found human breast milk and also rich in vitamin E. High quality of this oil makes its idle, massage oil for babies and also for skin and hair application

y cooking Coconut oil is widely used in cooking, the refined oil is one of most commonly used. y Manufacturing:Coconut oil is used in volume quantities for making soap & cosmetics Hydrogenated coconut oil is used in non-creamers and snack food Fractionated coconut oil is used in manufacture of essences, massage oil & Cosmetics Coconut oil is an important component of many industrial lubricant for example in the cold rolling of steel strip y Cosmetics and skin treatments:Coconut oil is an excellent moistures and softener. Coconut oil is used for styling hair, cooling or smoothening the head, using as a fuel. y Traditional use:Coconut oil is used in oil lamps y In diesel engines:-

CHMM College Chavarcode

Page 13


Coconut oil has been tested for use as a feed stock for biodiesel to be used as a diesel engine fuel. In this manner it can be applied to power generators and transport using diesel engines. Raw coconut oil can be used as a fuel for generating electricity by remote communities that have an abundant supply of coconut and milling capacity, provided diesel engines are adopted Coconut oil is currently used as a fuel for transport in Philippians y Health effects:Studies have founded that coconut oil can be help in weight loss and poison recovery y Antimicrobial effect Coconut oil is used in the treatment of fungal infections y Coconut oil-unique Healthy:Coconut oil find extensive use in food, toiletary and industrial sector because of its unique characteristics. The numerous qualities of coconut oil reported are: Oil of natural origin  Edible in raw form  Saturated and stable  Pleasing flavor  Light color  Pleasant aroma  Biodegradable  High resistance to oxidative rancidity  Sharp melting behavior  Narrow temperature range of melting  Skin friendly oil  Effective heat transfer agent in frying  Better shelf life of fried product  Ideal for deep frying  Idle confectionary fat  Provides moisture barrier and imparts high gloss  For bakery items in spray oil use  Low viscosity  Superior baby oil
CHMM College Chavarcode Page 14


 Oldest and most widely used cosmetic raw material  Maximum guideline content  Easily saponifiable even in cold  Good emollient on on skin ,skull hair  Gives softness suppleness to skin in regular massaging  Spreads easily on the skin when used as massage oil  Excellent base for hair oil  Provides gloss to hair  Germicidal to antimicrobial property  Lower evaporative loss of water from skin  Protects skin from heat  Ready penetration in to the skin and appreciable water absorbing property  Imparts headiness and lathering property to soap  Illuminant & lubricant  Does not leave asoky flame if used in open lamp  Blends well with other oil  Potential fatty raw material in chemical industry  Due to its biodegradable nature  Excellent fat source in preparation of filled milk and infant food formula  Essential for the manufacture of toilet soaps, shaving cream etc  No harmful effect due to reheating  Can be converted into diesel fuel  Essential ingredient in ghee substitutes.

 Easy digestibility and absorbability  Idle energy source in baby food  Contains vitamin E  Composed mainly for short &medium chain fatty acid which have desirable qualities and functions.  Does not contain cholesterol
CHMM College Chavarcode Page 15


 Reduce fat accumulation in body  Easily oxidized and therefore preferred energy source  Requires no transport system to absorbs, digest and metabolize  Very low content at omega 6 fatty acid  Studies undertaken by the biochemistry department, university of Kerala showed that coconut oil: Does not evaluate blood cholesterol  Increases blood HDL cholesterol  Consumed along with coconut carnal lowers the blood cholesterol

Copra is the dried meat, or karnel, of the coconut. Copra making can be defined as systematic process through which the fresh meat coconut 50 to 55% moisture is dried in sun or other source to bring down the moisture content to 5 to 6% only. Eleven to twelve month old nut reutilized for copra making to option the optimum output of the better quality copra. The nuts are first husked to remove the fiber cotter layer of the husk. The husked nuts are then split in to half and water is drained off. These splinted nuts are then kept for half an hour with the open side turned down to ensure that the entire water is drained off. If this is not done, some moisture will be retained which will in turn leads to deterioration of copra. The half or cops ready for drying which should invariably start with in 4 hours after breaking. Two types of copra namely milling and edible are made in India. Milling copra is used to extract oil while edible grade of copra is consumed as a dry fruit and used for religious purpose. Milling copra is generally manufactured by adopting sun drying and artificial means substantial Modern hot air drier resulting in the availability of superior quality copra which is required for the manufacture of best grade coconut oil. A good number of farmers co-operative societies are also involved in the manufacture and marketing a of milling copra. Milling copra is available in different grades of edible copra are available in the market according to the size and color etc. Quality of copra is determined based on moisture content and extent of interior type of copra Interior types of copra are generally:-

CHMM College Chavarcode

Page 16


1. Mould effect 2. Immature or robbery copra made from immature nut 3. Insect attacked copra 4. Discolored copra Good quality copra in which contain not more than 6% moisture. Coconut oil is obtained by crushing copra; most efficient method of extraction is by expeller. Table no : Various methods Chucks Rotary mills Expellers Of oil 50% 62% 63% - 60% - 63% - 65%

Coconut Cake
Coconut cake is the residue left after the extraction of oil from copra which is mainly used as a cattle feed. Coconut cakes contain 4-5% oil which is extracted by solvent extraction process. This oil is generally used for industrial purpose and de-oiled cake is used to make mixed cattle feed. These few such units in the country especially in Kerala

National Agricultural co-operative marketing federation, which was organized in 1958, represents the entire marketing structure at the national level. It was established with the object of the members in agricultural and other commodities

There main Objective are  To make arrangements for the supply of agricultural requirement of its members.
CHMM College Chavarcode Page 17


 To render advice and technical guidance to its members The main aim of NAFED is to assisting the marketing of co-operatives in the state to develop their marketing business. In order to achieve this NAFED adopt various strategies with a view to ensure better return to farmers, it undertake price support operation butter stocking, export and import of commodities etc to balance production with consumption. When the government of India formulates policies for support price in respect of certain commodities it appoints NAFED as its agency for procurement. C0c0nut day (2nd September) September 2nd of every year has been designated as coconut day as per the decision of Asian &pacific coconut community headquarters of Jakarta Indonesia. Foundation day of APCC also fall on 2nd September. Major coconut growing countries including India are the members of the APCC

KERAFED was constituted by the Government of Kerala in 1987 with the confide object of arranging to procure the produce of coconut farmers to regulate marketing operation of the product to retrieve the segment of price crunch they were confronting at large. A production unit relating to the sector was brought into operation in 1991 to crush and market copra procured from the farmers at remuneration price to relive the section of price crunch and also to cater the edible oil requirement of the society by maintain high quality standards.

Company Profile

Kerala kerakashaka sahakarana federation Ltd. (KERAFED) was registered under the cooperative societys act 1987, withassistance of European Economic Community. National cooperative development cooperation and the government of Kerala. KERAFED is apex cooperative federation of coconut farmers in Kerala and is the largest producer of coconut oil in India. The federation started commercial production in 1993. The head office of KERAFED is located in Thiruvananthapuram. KERAFED coconut oil complex at
CHMM College Chavarcode Page 18


karunagapally in kollam district is one of the biggest such unit in India, with a capacity of 200 tons per day. The primary objective of KERAFED is to organize coconut growers by bringing them under the co operative umbrella and to provide them with all supplies and services to augment their income base by increasing productivity and value additions through the integration system of production achievement, storage, processing, processing, diversification and marketing of coconut oil and all any product of coconut palm at a price remunerative to grosses and fair to consumers As the farmers in Kerala were relying under the strange hold of powerful country trade costels that consistently market conditions and dedicate price. Tend to their advantages KERAFED aimed at 50% to 60% of the total coconut/copra product in the state which will be processed on its own processing unit and marketed. KERAFED is the single largest producers of coconut /copra produced in Kerala from 900 societies all over the state. KERAFED has a good distribution consisting of stockiest, dealers and suppliers For over 29 lakh coconut farmers in the state, KERAFED has been a beacon although, affecting them attractive support prices fair coconut and copra during unfavorable market conditions, processing copra under the price support scheme on behalf of NAFED, government of India and rendering value added services to enhance their earning through improved productivity and by assisting them in production and procurement. Apart from this, the federation organizes periodic extension activities to help farmers, like demonstration form, training camps, literature on coconut farming. Also KERAFED reimburses the expenses for establishing copra drive s, through the member of the federation namely primary agricultural co-operation credit society.

CHMM College Chavarcode

Page 19


SL.NO Members of the federation 1. 2. 3. Government of Kerala Kerala state co-operative agriculture Kerala state co-operative agriculture development bank Ltd. 4. 5. 6. District co-operative bank Ltd. Primary co-operative bank agriculture Primary agriculture co-operative bank credit society

Numbers 1 1 1

9 25 898 935 no.


The Objective of KERAFED

 To reduce edible oil import  To provide an impulse effect ion internal production  To develop the agricultural potential of Kerala state  To strengthen the cooperative movement  To secure the marketing of coconut of coconut and its byproduct,  There by assuring income price to growers  To establish and manage infrastructure facilitys for production and supply at input and process manufacturing and marketing of product and by product of coconut palm

CHMM College Chavarcode

Page 20


 To undertake research and development activities on product, processing and marketing Thus to increases the income of 29 lakh farmers families and create employment opportunities on industrial sector For effectively and efficiently carrying out the administrative and operational practices on day to day basis, the state is dividing in to three regions southern region,nortern of revenue district Trivandrum, kollam, kottayam,idukki,ernakulam,thrissur,palakkad district. 300 primary agricultural credit cooperative societies in such region are member of the federation to undertake production, procurement and marketing actives at farmers level. For processing and product diversification each region has one processing plant with a capital 200 tone of copra per day.

Copra Procurement Or Raw Material Collection Process Of KERAFED:

Coconut farmers or coconut growers

Primary agricultural cooperative societies

Mobile team of kerafed

Processing plant or god own

CHMM College Chavarcode

Page 21


Coconut farmers deposit their product with respective primary agricultural co operative societies and collect the copra at the rate prevailing in the market on that particular day. Primary agricultural co-operative society on their part checks the quality of copra and in terms the kerafed about the procurement details. T he respective mobile team officer visit the society and collect the same after checking the quality transaction details. This is transferred to the plant for processing.

Objectives Of Kerafed:-

 To reduce edible oil imports.  To provide an impulse effect on internal production of coconut.  To develop the agricultural potential of Kerala state  To strengthen the co-operative movement.  To secure the marketing of coconut and its by products, there by assuring economic price to the growers.  To establish and manage infra structural for production and supply of input and processing manufacturing and marketing of products and by products of coconut palm  To undertake research and development activities on production ,[processing and marketing,

Thus to increase the income of 29 lakh farmers families and create employments opportunities is the industrial sector. For effectively and efficiently carry may out the administrative and operational practices on a day to day basis, the stage is divided into three region consist of the region ,the northern region and centre region .the southern consist of the revenue districts.Thiruvanathapuram, kollam, pathanamthitta and alappuzha, the northern region consist of malapuram, Kozhikode, wayanad, kannur and kasargode district and the central region of kottayam,, idukki,ernakulam, thrissur,palakkad districts. 300 primary agricultural credit co-operative societies in each region are members of the federation to undertake production, procurement,

CHMM College Chavarcode

Page 22


marketing activities at the farmers level .for processing and product diversification, each region will have one processing plant with a capacity 200 tons per day.

CHMM College Chavarcode

Page 23


Meaning of Working Capital

Working capital refers to the excess of current assets over current liabilities. The manager of working capital is, therefore, concerned with the problems that arise in administering of both current assets and current liabilities. In other words, working capital management involves deciding up on the amount and composition of current assets and how to finance these assets.

Forecasting/Determining/ Working Capital Requirements

The estimation of working capital requirements is not an easy task. Before starting this exercise, a large number of factors are to be considered. The study of operating cycle is one among them. It is the circular flow of cash to suppliers, to accounts receivables and then to cash. The concept of operating cycle has the following two important aspects:

a) The number of conversion of cash, and b) The length of time required to complete each stage. Both these aspects help in determining working capital requirements of a concern.

Operating cycle is a continuous process. However, the number of stages in an operating cycle of a concern depends on the nature of its business. Thus the operating cycle in a manufacturing concern involves the following stages Operating cycle of a Manufacturing Concern.

CHMM College Chavarcode

Page 24


Finished goods (3)

1. 2. 3. 4. 5.

Purchase of raw materials and warehousing. Work-in-process (manufacturing activities). Warehousing of finished goods before sale. Sales activities Debtors

The numbers of stages of operating cycle involved in a trading concern are as follows:
Debtors (3)


Sales (2)

Finished Goods (1)

Sources of Working Capital

CHMM College Chavarcode

Page 25


The working capital requirements of a concern are brought into two categories. They are: (a) permanent or fixed capital requirements and (b) temporary or variable working capital requirements. The fixed proportion of working capital should be generally financed from the long-term sources while the temporary or variable working capital requirements of a concern may be met from the short-term sources. The various long-term sources for financing of working capital requirements are as follows: a. Equity capital b. Debentures and preference shares c. Long-term loans The following are the various short-term sources for financing of working capital requirements: i) Trade credit (sundry creditors, bills payable) ii) Bank overdraft iii) Current provisions (such as provision for taxation) iv) Short term loans from sources other than banks (such as loans from directors, partners, employees, wages and salaries outstanding, income received but not earned or advance payment from customers). In India, the major portion of working capital finance is provided by commercial banks and trade creditors. But in the case of public enterprise, in spite of Governments directives that they have to meet cent per cent of their working capital needs by the cash credit arrangements with the banks (exclusively with SBI and subsidiaries), a major portion of their working capital requirements is met by internal sources (including depreciation reserves) and diversion of capital funds. Of late, there has been emphasis on using long term sources to finance working capital requirements (tendon Committee Report). Now-a-days, companies are issuing debentures (both convertible and non-convertible) to meet their working capital needs. Moreover, in
CHMM College Chavarcode Page 26


order to make non-convertible debentures has been reduced from 12 years to 7 years and the ceiling rate of interest has been raised to 15%.

Financing of Working capital

The working capital financing policy of a firm is mainly concerned with the determination of a suitable mix between the long-term sources and short-term sources of finance. Usually this mix is guided by:

a. The tradeoff between risk and profitability and b. The costs of alternative combinations of short term and long term sources. Moreover, on the basis of risk, profitability and cost, a firm should have different working capital financing policies. But an ideal policy should be such which is least costly, least risky and most profitable. However, as the ideal policy cannot be practiced in real market situations, the task of management is to strike a happy balance among these three variables, viz., risks, profitability and cost. For this purpose, the following guidelines are available: (a) The firm can use only long-term finance. It is the most costly in terms of interest rates and most conservative policy in terms of certainty of availability of funds. (b) The firm can use only short-term finance. It is the least costly in the short-run, the most profitable and most risky of available of funds. A choice of suitable financing strategy between these two extremes is influenced by the following factors: i) The Approval of creditors and capital Market: This approval is reflected in the actual ratios of the two sources in financial statement of firms in industry, in general.
CHMM College Chavarcode Page 27


ii) The Condition of Money and Capital Markets: When the market in long term sources of finance is in depressed condition, there is no choice, but to raise funds from short term sources. iii) The Composition of Current Assets: In case a firm has quickly convertible non-cash current assets, it may rely more up on short-term sources than upon long-term sources. Retailers of food articles, transport undertakings, hotels, etc., are examples of such firms. iv) Recent Use of Sources: In case a firm has incurred heavy capital expenditure financed by long-term sources in the recent past, then such a firm has no other choice than to finance increases in current assets by short-term borrowings and vice-versa. v) Management Attitude towards Risk Associated with a Source of Finance: The attitude of management on raising funds long term and short term sources are important while taking decisions on financing working capital requirements. This attitude is formed by taking into account, cash inflows and out flows (cash budget), funds from business operation (profit and loss account), financial position (balance sheet), conditions in the capital market, banking situations, fiscal and monetary policies.

Advantages of Long-term Sources of Working capital

1. Less Risk: In the case of long-term sources of finance, the firm will have sufficient time to plan for repayment. Thus the risk that the firm may not have funds to repay loans on maturity date is less. 2. High Stability: In the case of long term sources of finance, a firm can have enough funds for comparatively longer period to finance
CHMM College Chavarcode Page 28


accumulation of inventories or sale on credit (receivables) during offseason. Thus the use of long-term sources of finance increases the degree of stability in operations. 3. High Liquidity: The use of long-term sources of finance increases the firms liquidity as the firm has less worry about the repayment of them in the short-run.

Advantages of Short term Sources of Working Capital

1) Low Costs: In the case of short-term sources of finance, interest is paid only for short periods for which funds are used. The overall impact of this is reduction in costs. 2) Close Relations with Banks: In the case of short-term sources of finance the financial manager of a firm has to frequently deal with bank officials. Thus he can establish a close relation with bank officials which can be used beneficially in larger dealing later on.

Analysis of Working Capital or Measuring Working Capital

Working capital is the lifeblood of a business. The success of a business, therefore, depends on its adequacy. The outside parties such as trade creditors, banks and financial institutions, debenture holders, share holders, etc., and the management of the firm are highly interested in knowing the overall working capital position of a concern through an analysis. Thus the basic aim of working capital analysis is to evaluate solvency, liquidity and the cost of financing a concern. The analysis of working capital can be conducted through the following methods: 1. Ratio Analysis 2. Funds Flow Analysis

CHMM College Chavarcode

Page 29


Ratio Analysis: Ratio analysis is the most popular technique of working capital analysis. It can be used for measuring short-term liquidity or the working capital position of a concern. Some commonly used ratios for this purpose are as follows:

a. Current ratio b. Acid test ratio c. Absolute liquid ratio d. Inventory turnover ratio e. Receivables turnover ratio f. Payables turnover ratio g. Working capital turnover ratio h. Working capital turnover ratio i. Working capital leverage j. Ratio of current liabilities to tangible net worth

Funds Flow Analysis: It is a technique designated to study the sources from which additional funds derived and the uses to which these funds are being put. It is an effective management tool to study changes in working capital between the two points of time, along with events causing such changes. The funds flow analysis consists of: (a) preparing schedule of changes in working capital and (b) statement of sources and application of fund.
CHMM College Chavarcode Page 30


CHMM College Chavarcode

Page 31