Working Capital Financing and Credit Appraisal

11582 Words Jul 17th, 2012 47 Pages
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,
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Thus, Gross Working Capital = Total Current Assets. * Net Working Capital:
It refers to the difference between current assets and current liabilities. Current liabilities refer to those claims which are expected to mature for payment within an operating cycle and include creditors, bills payable, outstanding expenses and bank overdraft. It can be positive or negative. A positive net working capital occurs when current assets exceed current liabilities and a negative working capital occurs when current liabilities exceed current assets.
Net Working Capital = Gross Working Capital or Current Assets – Current Liabilities
Net working capital can alternatively defined as that part of the current assets which are financed with long-term funds.
Now, let us have a look at some of the other interesting concepts of working capital: * Zero Working Capital:
Zero Working Capital = Inventories + Receivables – Payables.
The rationale behind this concept is that inventories and receivables are the major constituents of current assets which affect sales. Further, suppliers finance inventories through accounts payable. * Permanent Working Capital:
It refers to a certain minimum level of current assets which is essential for the firm to carry on its business irrespective of the level of operations. This is the irreducible minimum amount necessary

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