1 / 13

Chapter 30 WORKING CAPITAL FINANCING

Chapter 30 WORKING CAPITAL FINANCING.  Centre for Financial Management , Bangalore. OUTLINE Accruals Trade credit Working capital advance by commercial banks Regulation of bank finance Public deposits Inter-corporate deposits Short-term loans from financial institutions

montana-bond
Download Presentation

Chapter 30 WORKING CAPITAL FINANCING

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 30 WORKING CAPITAL FINANCING  Centre for Financial Management , Bangalore

  2. OUTLINE • Accruals • Trade credit • Working capital advance by commercial banks • Regulation of bank finance • Public deposits • Inter-corporate deposits • Short-term loans from financial institutions • Rights debentures for working capital • Commercial paper • Factoring  Centre for Financial Management , Bangalore

  3. ACCRUALS • The major accrual items are wages and provisions. • Accruals vary with the level of activity of the firm. • While accruals are a welcome source of financing, they • are typically not amenable to control by management.  Centre for Financial Management , Bangalore

  4. TRADE CREDIT • Trade credit represents the credit extended by the • suppliers of goods and services. It is a spontaneous • source of finance. • The confidence of suppliers is the key to securing trade • credit. • The cost of trade credit is: • Discount % 360 • x • 100 – Discount % Credit period – Discount period  Centre for Financial Management , Bangalore

  5. WORKING CAPITAL ADVANCE BY COMMERCIAL BANKS • Application and processing • Sanction, terms and conditions • Forms of bank finance • Cash credits/Overdrafts • Loans • Purchase/Discount of Bills • Letter of credit • Security • Hypothecation • Pledge • Margin amount  Centre for Financial Management , Bangalore

  6. MAXIMUM PERMISSIBLE BANK FINANCE (MPBF) • Tandon Committee had suggested three methods for determining the MPBF • Method 1 : MPBF = 0.75 (CA – CL) • Method 2 : MPBF = 0.75 (CA) – CL • Method 3 : MPBF = 0.75 (CA – CCA) – CL • CA = current assets • CL = non-banking current liabilities • CCA = core current assets  Centre for Financial Management , Bangalore

  7. PUBLIC DEPOSITS • These are unsecured deposits from the public. • Public deposits cannot exceed 25 percent of share capital • and free reserves. • The maximum maturity period allowed for public • deposits is 3 years. However, for NBFCs it is 5 years.  Centre for Financial Management , Bangalore

  8. INTER-CORPORATE DEPOSITS • A deposit made by one company with another, normally • for a period up to six months is referred to as an inter- • corporate deposit. • Inter-corporate deposits are typically unsecured. • Inter-corporate deposits are usually of three types: call • deposits, three-month deposits, and six-month deposits.  Centre for Financial Management , Bangalore

  9. SHORT-TERM LOANS FROM FINANCIAL INSTITUTIONS • Insurance companies provide short-term loans to • manufacturing companies with an excellent track record. • Such loans are unsecured and given for a period of 1 • year, renewable for two consecutive years. • A company, to be eligible for such loans, should satisfy • certain conditions relating to dividend payment, debt- • equity ratio, current ratio, and interest cover ratio.  Centre for Financial Management , Bangalore

  10. RIGHTS DEBENTURES FOR WORKING CAPITAL • A company can issue “rights” debentures to its shareholders • to augment the long-term source for working capital • requirements • The key guidelines applicable to “rights” debentures relate to • the quantum of such issues and the debt : equity ratio  Centre for Financial Management , Bangalore

  11. COMMERCIAL PAPER • Commercial paper represents short-term unsecured • promissory notes issued by firms which enjoy a fairly • high credit rating. • Commercial paper is either directly placed with • investors or sold through dealers • The effective pre-tax cost of commercial paper is: • Face value – Net amount realised 360 • Net amount realised Maturity period  Centre for Financial Management , Bangalore

  12. FACTORING A factor is a financial institution which offers services relating to management and financing of debt arising from credit sales. customer  Centre for Financial Management , Bangalore

  13. SUMMING UP • Typically, the current assets of the firm are supported by • a combination of long-term and short-term sources of • financing. • The following sources of finance more or less exclusively • support current assets: accruals, trade credit, working • capital advance by commercial banks, public deposits, • inter-corporate deposits, shot-term loans from financial • institutions, rights debentures for working capital, • commercial paper, and factoring.  Centre for Financial Management , Bangalore

More Related