Sunday, 19 January 2020

Unit 4: The Financing Mix

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Unit 4: The Financing Mix

Working capital is a means to run the business smoothly and profitably, and not an end.

Thus, concept of working capital is a means to run importance in a going concern.

A going concern, usually, has a positive balance of working capital as its own excess of current assets over current liabilities, but sometimes the uses of working capital may be more than the sources resulting into a negative value of working capital.

This negative balance is generally offset soon by gains in the following periods.

A study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business.

This involves the need of working capital analysis.

The norms of working capital finance followed by bank since mid-70’s were mainly based on the recommendations of the Tandon Committee.

The Chore Committee made further recommendations to strengthen the procedures and norms for working capital finance by banks.

In the deregulated economic environment in India recently, banks have considerably relaxed their criteria of lending.

In fact, each bank can develop its own criteria for the working capital finance.

Aggressive Approach: The aggressive approach suggests that the entire estimated requirements of currents asset should be financed from short-term sources and even apart of fixed assets investments be financed from short-term sources.

Conservative Approach: This approach suggests that the entire estimated investments in current assets should be financed from long-term sources and the short-term sources should be used only for emergency requirements.

Funds flow analysis: A technical device designated to study the sources from which additional funds were derived and the use to which these sources were put.

Hedging: The term ‘hedging’ usually refers to two off-selling transactions of a simultaneous but opposite nature which counterbalance the effect of each other.

Letter of credit: A letter of credit popularly known as L/C is an undertaking by a bank to honour the obligations of its customer up to a specified amount.

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