Working Capital Management

Working Capital


Working capital is the fuel by which any business run, survive or shut.  It is so vital that it decides the future of the business. For better understanding, let's fasten our belt. 

 Update on 30.05.2019


coin is the business and fuel is working capital, as fuel is poring in the coin it is becoming bigger.

Banks want the CMA (Credit Monitoring Arrangement) report from the client for sanctioning the overdraft limit, Loans, Cash credit limit, and that CMA is nothing but the working capital calculation in some sense.

 This page will help you to understand the following topics: 
  1. Meaning of working capital. 
  2. Types of working capital. 
  3. The relation between working capital and businesses. 
  4. Factors to be considered while determining the working capital of the business. 
  5. Meaning of working capital cycle. 
  6. Bank finance also depends on working capital. 
  7. Tandon Committee and utilisation of their rules by banks while granting the working capital finance to the business. 
  8. Describe the Chore Committee Report. 
  1. Meaning of working capital. 
The working capital simply means the difference between current assets and current liabilities. In border term, it means the funds available with the enterprises for day to day transactions.
  1. Types of working capital. 
The working capital is of 4 types: 
  1. GWC (Gross working capital) = It means the gross value of the current assets so, GWC is not so useful for knowing working capital because it doesn’t take current liabilities into account.
  2. NWC (Net working capital) = It means the difference between current assets and current liabilities so, NWC is more logical and gives an accurate view of the working capital position of the business.
  3. PWC (Permanent working capital) = It means the minimum amount of working capital always required by the business all the time for running its operations otherwise, its existence will be in danger or we can say it’s the baseline working capital.
  4. TWC (Temporary working capital) = It means the working capital which fluctuates from time to time as per the requirement of the business, and it is required above the PWC, or we can say it is above the baseline working capital.
  1. The relation between working capital and businesses. 
There is a direct relationship between working capital and business, as the business grows the requirement of the working capital increases simultaneously. 
Note: Too high and too low working capital are extremely dangerous for the business.
As we discussed earlier, working capital is the fuel so very high or very low will blow your business. 
  1. Factors to be considered while determining the working capital of the business. 
  • Nature of the Business
  • Credit policy
  • Production and manufacturing policy
  • Growth factor
  • Business cycle
  • Stock holding policy
  • Abnormal factors
  • Taxes factor
  • Efficiency policy
  • Dividend policy
  1. Meaning of working capital cycle. 
WCC means in how much time duration the company is completing its cycle from paying to the supplier to the conversion of stock in cash.
The formula is for calculating
WCC = Raw material storage period + WIP holding period + Finished goods storage period + Debtor collection period + Credit availed period 
Or 
WCC = R + W + F + D - C 
  1. Bank finance also depends on working capital.
Whenever any business owner requires fund for business, the bank demands the working capital documents to a look into the business health and stability.
The major type of finance in which the bank looks for the working capital of the business is as follows:
  • Cash credit against stock
  • Overdraft
  • Bill discount credit
  • Loans 
  1. Tandon Committee and utilization of their rules by banks while granting the working capital finance to the business.
Reserve Bank of India, trying from past 5 decades to bring the discipline in the distribution of credit by the bank to the business and here Tandon Committee plays the vital role because it gives rules, regulations and method to the bank for MPBB (maximum permissible bank borrowings).
Let's look at the method which Tandon Committee suggests: 
It gives 3 formulas and says the least will be chosen as MPBB. 
1st
2nd
3rd
MPBB= 75% (CA-CL)
MPBB= 75% (CA) – CL
MPBB= 75% (CA-CCA) - CL
LOWER OF THE ABOVE WILL BE CHOSEN

 Note:
  1. CCA is cored current assets and can be calculated as (current assets - stock)
  2. CA is the current assets
  3. CL is a current liability

Let's see by example: 
Yes, Ltd. is having its
current assets = ₹ 20000
current liability = ₹ 12000
core current assets = ₹ 3000 
calculate MPBB as per the Tandon Committee.

  Ans.


1st
2nd
3rd
MPBB= 75% (CA-CL)
MPBB= 75% (CA) – CL
MPBB= 75% (CA-CCA) - CL
MPBB= 75% (20000-12000)
= ₹6000
MPBB= 75% (20000) – 12000
= ₹ 3000
MPBB = 75% (20000-3000) -12000
= ₹ 750
MPBB= ₹ 750 (LOWER OF THE ABOVE WILL BE CHOSEN)

  1. Describe the Chore Committee Report.
The Chore Committee is the one step forward to the Tandon Committee; it directed the financial institutions to the following points:
  • Follow the Tandon Committee for MPBB purpose.
  • No bifurcation of cash credit accounts
  • Fixation of separate limits for peak level, non-peak level requirements.
  • Submission of quarterly statements by even small borrowers.
  • Discourage the activities like temporary limit or ad-hoc limit.

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