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INTRODUCTION

CAPITAL: -

Capital is a term for financial assets (such as funds held in deposit accounts),
as well as for tangible factors of production such as manufacturing equipment.
Additionally, capital includes facilities, such as the buildings used to produce and
store manufactured goods. Materials used and consumed as part of the manufacturing
process do not qualify as capital.

CAPITAL VS. MONEY

People often interchange the words "capital" and "money," believing they
mean the same thing. But there's a substantial difference between the two. Capital
involves the aspects of the company that help shape and grow it, and includes any of
its assets that can benefit the company in the long term, whereas money refers to the
instrument used to purchase goods and services, serving a more immediate purpose.
There are many types of capital used in a business and some of them are as follows:

TYPES OF CAPITAL

 DEBT CAPITAL:

A business can acquire capital through the assumption of debt. Debt

capital can be obtained through private sources, such as friends and family,
financial institutions and insurance companies, or through public sources, such
as federal loan programs.

 EQUITY CAPITAL:

Equity capital is based on investments that, unlike debt capital, do not

need to be repaid. This can include private investment by business owners, as
well as contributions derived from the sale of stock.

 WORKING CAPITAL:

Defined as the difference between a company's current assets and

current liabilities, working capital measures a company's short-term liquidity –

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more specifically, its ability to cover its debts, accounts payable and other
obligations that are due within a year. In a sense, it's a snapshot of a firm's
financial health.

 TRADING CAPITAL:
Trading capital refers to the amount of money allotted to buying and
selling various securities. Generally, trading capital is distinct from investment
capital in that it is reserved for more speculative ventures. Trading capital is
sometimes referred to as "bankroll." Investors may attempt to add to their
trading capital by employing a variety of trade optimization methods. These
methods attempt to make the best use of capital by determining the ideal
percentage of funds to invest each time. In particular, in order to be successful,
it is important for traders to determine the optimal reserves required for their
investing strategies. We will study working capital in deep:

Working capital is a financial metric which represents operating liquidity available to

a business, organization or other entity, including governmental entities. Along with
fixed assets such as plant and equipment, working capital is considered a part of
operating capital. Gross working capital is equal to current assets. Working capital is
calculated as current assets minus current liabilities. If current assets are less than
current liabilities, an entity has a working capital deficiency, also called a working
capital deficit.

A company can be endowed with assets and profitability but may fall short of
liquidity if its assets cannot be readily converted into cash. Positive working capital is
required to ensure that a firm is able to continue its operations and that it has
sufficient funds to satisfy both maturing short-term debt and upcoming operational
expenses. The management of working capital involves managing inventories,
accounts receivable and payable, and cash.

DEFINITION

The working capital cycle is the amount of time it takes to turn the net current
assets and current liabilities into cash. The longer the cycle is, the longer a business is
tying up capital in its working capital without earning a return on it. Therefore,

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companies strive to reduce their working capital cycle by collecting receivables

quicker or sometimes stretching accounts payable.

HISTORY OF WORKING CAPITAL

The term working capital originated with the old Yankee peddler who would
load up his wagon and go off to peddle his wares. The merchandise was called
“working capital” because it was what he actually sold, or “turned over,” to produce
his profits. The wagon and horse were his fixed assets. He generally owned the horse
and wagon (so they were financed with “equity” capital), but he bought his
merchandise on credit (that is, by borrowing from his supplier) or with money
borrowed from a bank. Those loans were called working capital loans, and they had to
be repaid after each trip to demonstrate that the peddler was solvent and worthy of a
new loan. Banks that followed this procedure were said to be employing “sound
banking practices.” The more trips the peddler took per year, the faster his working
capital turned over and the greater his profits

WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short-term financing are referred to

as working capital management. These involve managing the relationship between a
firm's short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that the firm is able to continue its operations and that it has
sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses.

A managerial accounting strategy focusing on maintaining efficient levels of both

components of working capital, current assets, and current liabilities, in respect to
each other. Working capital management ensures a company has sufficient cash flow
in order to meet its short-term debt obligations and operating expenses.

BREAKING DOWN WORKING CAPITAL

Working capital is a measure of both a company's operational efficiency and

its short-term financial health. The working capital ratio (current assets/current
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liabilities), or current ratio, indicates whether a company has enough short-term assets
to cover its short-term debt. A good working capital ratio is considered anything
between 1.2 and 2.0. A ratio of less than 1.0 indicates negative working capital, with
potential liquidity problems, while a ratio above 2.0 might indicate that a company is
not using its excess assets effectively to generate maximum possible revenue.

If a company's current assets do not exceed its current liabilities, then it may have
trouble paying back creditors or go bankrupt. A declining working capital ratio is a
red flag for financial analysts. They might also look at the quick ratio, which is more
of an acid test of short-term liquidity because it only includes cash and cash-
equivalents, marketable investments and accounts receivable.

CHANGES IN WORKING CAPITAL AFFECT A COMPANY'S

CASH FLOW

Most projects require an investment in working capital, which reduces cash flow, but
cash will also fall if money is collected too slowly, or if sales volumes are decreasing
– which will lead to a fall in accounts receivable. Companies that are using working
capital inefficiently can boost cash flow by squeezing suppliers and customers.

MANAGEMENT OF WORKING CAPITAL

Guided by the above criteria, management will use a combination of policies

and techniques for the management of working capital. The policies aim at managing
the current assets (generally cash and cash equivalents, inventories and debtors) and
the short-term financing, such that cash flows and returns are acceptable.

 CASH MANAGEMENT

Identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs.

 INVENTORY MANAGEMENT

Identify the level of inventory which allows for uninterrupted

production but reduces the investment in raw materials—and minimizes
reordering costs—and hence increases cash flow. Besides this, the lead times

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in production should be lowered to reduce Work in Process (WIP) and

similarly, the Finished Goods should be kept on as low level as possible to
avoid overproduction.

 DEBTOR’S MANAGEMENT.
Identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion
cycle will be offset by increased revenue and hence Return on Capital (or vice
versa).

 SHORT-TERM FINANCING:
Identify the appropriate source of financing, given the cash conversion
cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".

WORKING CAPITAL CYCLE

A positive working capital cycle balances incoming and outgoing payment to

minimize net working capital and maximize free cash flow. For example, a company
that pays its suppliers in 30 day’s but takes 60 days to collect its receivables has a
working capital cycle of 30 days. This 30-day cycle usually needs to be funded
through a bank operating line, and the interest on this financing is a carrying cost that
reduces the company's profitability. Growing businesses require cash, and being able
to free up cash by shortening the working capital cycle is the most inexpensive way to
grow. Sophisticated buyers review closely a target's working capital cycle because it
provides them with an idea of the management's effectiveness at managing their
balance sheet and generating free cash flows.

As an absolute rule of funders, each of them wants to see a positive working capital.
Such situation gives them the possibility to think that your company has more than
enough current assets to cover financial obligations. Though, the same can’t be said
about the negative working capital. A large number of funders believe that businesses
can’t be sustainable with a negative working capital, which is a wrong way of

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thinking. In order to run a sustainable business with a negative working capital, it’s
essential to understand some key components.

1. Approach your suppliers and persuade them to let you purchase the inventory
on 1-2-month credit terms, but keep in mind that you must sell the purchased
goods, to consumers, for money.
2. Effectively monitor your inventory management, make sure that it’s often
refilled and with the help of your supplier, back up your warehouse.

Plus, big companies like McDonald’s, Amazon, Dell, General Electric

and Wal-Mart are using negative working capital.

DECISION CRITERIA

By definition, working capital management entails short-term decisions—

generally, relating to the next one-year periods - which are "reversible". These
decisions are therefore not taken on the same basis as capital-investment decisions
(NPV or related, as above); rather, they will be based on cash flows, or profitability,
or both.

 One measure of cash flow is provided by the cash conversion cycle—the net
number of days from the outlay of cash for raw material to receiving payment
from the customer. As a management tool, this metric makes explicit the inter-
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relatedness of decisions relating to inventories, accounts receivable and

payable, and cash. Because this number effectively corresponds to the time
that the firm's cash is tied up in operations and unavailable for other activities,
management generally aims at a low net count.
 In this context, the most useful measure of profitability is return on capital
(ROC). The result is shown as a percentage, determined by dividing relevant
income for the 12 months by capital employed; return on equity (ROE) shows
this result for the firm's shareholders. Firm value is enhanced when, and if, the
return on capital, which results from working-capital management, exceeds
the cost of capital, which results from capital investment decisions as above.
ROC measures are therefore useful as a management tool, in that they link
short-term policy with long-term decision making.
 Credit policy of the firm: Another factor affecting working capital
management is credit policy of the firm. It includes buying of raw material and
selling of finished goods either in cash or on credit. This affects the cash
conversion cycle

CALCULATION OF WORKING CAPITAL

Net working capital is a liquidity calculation that measures a company’s

ability to pay off its current liabilities with current assets. This measurement is
important to management, vendors, and general creditors because it shows the firm’s
short-term liquidity as well as management’s ability to use its assets efficiently.

Much like the working capital ratio, the net working capital formula focuses on
current liabilities like trade debts, accounts payable, and vendor notes that must be
repaid in the current year. It only makes sense the vendors and creditors would like to
see how much current assets, assets that are expected to be converted into cash in the
current year, are available to pay for the liabilities that will become due in the coming
12 months.

If a company can’t meet its current obligations with current assets, it will be forced to
use its long-term assets, or income producing assets, to pay off its current obligations.

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This can lead decreased operations, sales, and may even be an indicator of more
severe organizational and financial problems.

FORMULA

WORKING CAPITAL = CURRENT ASSETS – CURRENT

LIABILITIES

EXAMPLE CALCULATION WITH THE WORKING CAPITAL

FORMULA

As an example, a company can increase its working capital by selling more of

its products. If the price per unit of the product is 1000 and cost per unit in inventory
is 600, the company’s working capital will increase by 400 for every unit, because
either cash or accounts receivable will increase.

Comparing the working capital of a company against its competitors in the same
industry can demonstrate its competitive position. If Company A has working capital
of 40,000 while Companies B and C have 15,000 and 10,000, respectively, Company
A can spend more money to grow its business faster than its competitors.

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ADJUSTMENTS TO THE WORKING CAPITAL FORMULA

While the above formula and example are the most standard definition of working
capital, there are other more focused definitions.

EXAMPLES OF ALTERNATIVE FORMULAS:

 Current Assets – Cash – Current Liabilities (excludes cash)

 Accounts Receivable + Inventory – Accounts Payable (this represents only the
“core” accounts that make up working capital in day-to-day operations of the
business)

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DAY’S WORKING CAPITAL

Day’s working capital is an accounting and finance term used to describe how
many days’ it takes for a company to convert its working capital into revenue. It can
be used in ratio and fundamental analysis. When utilizing any ratio, it is important to
consider how the company compares with similar businesses in the same industry and
how it compares with its own operations over time.

FORMULA

Average working capital × 365

Annual sale revenue

INTERPRETING DAY’S WORKING CAPITAL

The formula for day’s working capital is the product of average working
capital and 365 divided by annual sales. For example, if a company makes $10
million in sales and has working capital of $100,000, the day’s working capital is
calculated by multiplying $100,000 by 365 and then dividing the answer by $10
million. The answer is 3.65 days. However, if the company makes $100 million in
sales, the answer is 0.365 days.

An increased level of sales, all other things equal, produces a lower number of day’s
working capital because more sales means the company is converting working capital
to sales at a faster rate. A company with a day’s working capital ratio of 3.65 takes 10
times more time to turn working capital, such as inventory, into sales than a company
with a day’s working capital ratio of 0.365. Another way to interpret this is the
company with a day’s working capital ratio of 0.365 is 10 times more efficient than
the company with a ratio of 3.65. While the company with the higher ratio is
generally the most inefficient, it is important to compare against other companies in
the same industry, as different industries have different working capital standards.

WORKING CAPITAL RATIO

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The working capital ratio, also called the current ratio, is a liquidity ratio that
measures a firm’s ability to pay off its current liabilities with current assets. The
working capital ratio is important to creditors because it shows the liquidity of the
company.

Current liabilities are best paid with current assets like cash, cash equivalents, and
marketable securities because these assets can be converted into cash much quicker
than fixed assets. The faster the assets can be converted into cash, the more likely the
company will have the cash in time to pay its debts.

The reason this ratio is called the working capital ratio comes from the working
capital calculation. When current assets exceed current liabilities, the firm has enough
capital to run its day-to-day operations. In other words, it has enough capital to work.
The working capital ratio transforms the working capital calculation into a
comparison between current assets and current liabilities.

FORMULA

The working capital ratio is calculated by dividing current assets by current liabilities.

CURRENT ASSETS/CURRENT LIABILITIES

Let’s take a look at an example. Kay’s Machine Shop has several loans from banks
for equipment she purchased in the last five years. All of these loans are coming due
which is decreasing her working capital. At the end of the year, Kay had 100,000 of
current assets and 125,000 of current liabilities. Here is her WCR:

100,000/125,000=0.8

As you can see, Kay’s WCR is less than 1 because her debt is increasing. This makes
her business riskier to new potential credits. If Kay wants to apply for another loan,
she should pay off some of the liabilities to lower her working capital ratio before she
applies.

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ANALYSIS AND INTERPRETATION

Since the working capital ratio measures current assets as a percentage of current
liabilities, it would only make sense that a higher ratio is more favorable. A WCR of 1
indicates the current assets equal current liabilities. A ratio of 1 is usually considered
the middle ground. It’s not risky, but it is also not very safe. This means that the firm
would have to sell all of its current assets in order to pay off its current liabilities.

A ratio less than 1 is considered risky by creditors and investors because it shows the
company isn’t running efficiently and can’t cover its current debt properly. A ratio
less than 1 is always a bad thing and is often referred to as negative working capital.

On the other hand, a ratio above 1 shows outsiders that the company can pay all of its
current liabilities and still have current assets left over or positive working capital.

Since the working capital ratio has two main moving parts, assets and liabilities, it is
important to think about how they work together. In other words, how does the ratio
change if a firm’s current liabilities increase while the current assets stay the same?
Here are the four examples of changes that affect the ratio:

• Current assets increase = increase in WCR

• Current assets decrease= decrease in WCR

• Current liabilities increase = decrease in WCR

• Current liabilities decrease = increase in WCR

WORKING CAPITAL IMPORTANCE

Working capital indicates how well you positioned your company to meet its near-
term cash needs. When your company has significantly more cash on hand or
receivables that readily convert to cash than you have debt principal payments or
payments to vendors, your risk of ceasing operations due to an inability to pay your
bills plummets. Working capital financing can eliminate any gap between cash
flowing into operations and cash flowing out.

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SPEED AND FLEXIBILITY

One advantage of working capital financing is that most eligible companies can obtain
short-term loans, including accounts receivable credit lines, inventory loans or bank
lines of credit, in a short period of time. The loan amounts are typically a fraction of
revenues and are tied to assets that quickly convert to cash. Working capital financing
is generally flexible, with varying interest rates and repayment terms. This flexibility
can help companies with seasonal or periodic fluctuations smooth out cash flow.

SHORT-TERM OPTIONS

Accounts receivable credit lines and factoring, which occurs when your company sells
its receivables to a third party at a discount, directly tie to your company's accounts
receivables. As your company's revenues and associated receivables grow, the credit
line increases. As your company needs more money, these working capital options
make those funds available. These also provide a viable choice for smaller or newer
companies without the operational history or balance sheet strength to qualify for a
bank term loan or unsecured line of credit.

MEDIUM-TERM OPTIONS

Your company can also finance working capital with a term loan. Short-term working
capital financing addresses cyclical needs throughout the fiscal year. Mid-term
working capital financing provides the funds to purchase additional inventory and
generate the receivables that increase working capital. For companies with growth
prospects over the next few years, this option provides access to a steady stream of
capital to cover gaps created by growth-related expenses.

THE DISADVANTAGES OF LACK OF WORKING CAPITAL

Working capital in a small business represents a company’s current assets minus

current liabilities. Current assets are the resources that a company can easily convert
into cash within one year. Current liabilities are the debt obligations a company must

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repay within a year. Working capital measures, the efficiency and short-term financial
health of a company. Small-business owners need sufficient positive working capital
to operate successfully. A lack of working capital presents many disadvantages to
small businesses

HARD TO ATTRACT INVESTORS

A small business that lacks sufficient working capital may find it difficult to attract
investors and lenders. Working capital shows investors and creditors that a company
possesses the ability to pay back its loan or can earn a sufficient profit that allows
investors to earn a return on their investments. Some creditors may require a company
to use its assets as collateral. Creditors may view companies without working capital
as a risk. The inability to attract investors and lenders may affect a company’s ability
to purchase necessary resources.

DAY-TO-DAY OPERATIONS

Working capital measures, a company’s ability to turn short-term assets into cash. A
lack of working capital may jeopardize a company’s ability to finance its day-to-day
operations. Day-to-day operations in a small business typically include salaries,
inventory purchases and equipment need. A lack of working capital also makes it
difficult for a company to prepare for emergencies. For example, if a company loses a
majority of its inventory to unforeseen circumstances, a lack of working capital makes
it difficult to replace the inventory to operate.

DIFFICULT TO GROW BUSINESS

Positive working capital allows small-business owners to grow in the future. When a
company desires to grow or is trying to meet customer demands, it often purchases
additional assets needed to manufacture products or offer services at a quicker pace
and on a larger scale. A lack of working capital hinders a company from acquiring
what it needs to expand. If a company continues to experience problems with growth,
it may find itself losing customers to competitors.

IMPROVING WORKING CAPITAL

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Small businesses struggling to maintain a positive working company must take steps
to improve the situation to remain viable. One way to improve the amount of working
capital available is to focus on receiving cash payments. Emphasizing cash payments
may include revising your accounts receivable policies to encourage customers to pay
their invoices earlier. Although working capital includes current assets, a company
may experience cash-flow problems if assets are not converted to cash. Other methods
to increase working capital include selling long-term assets for cash or increasing
sales revenues.

IMPORTANCE OF WORKING CAPITAL MANAGEMENT IN

AVOIDING BANKRUPTCY

Managing assets and liabilities is one of the most important jobs for business
managers and accountants. Small businesses in particular must strike a perfect balance
between the two tosuccessfully continue operations, because they lack the capital to
absorb large losses. Proper working capital management proves essential in the
avoidance of bankruptcy by helping a business balance needs with obligations. A full
description of the relationship between working capital and bankruptcy requires an
explanation of the relevant terminology.

MANAGEMENT AND BANKRUPTCY

Businesses face bankruptcy when insufficient capital resources prevent them from
paying debts owed. Successful working capital management allows a business to pay
all debts as they mature, or come due, while continuing profitable business operations.
At the very least, successful working capital management allows a business to break
even. Therefore, working capitalmanagement is directly responsible for the avoidance
of bankruptcy. Unsuccessful working capital management can lead directly to
bankruptcy by preventing a business from paying off liabilities or by preventing the
generation of new capital with which to pay future debts.

IMPROVING WORKING CAPITAL AND MANAGEMENT

Several methods of improving working capital and working capital management exist.
Methods of improving working capital management begin with simple tasks such as
monitoring expenditures and upcoming debts daily, weekly and monthly and planning
in advance how tobalance the two. Lowering production costs while maintaining sales
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revenue increases profits, thus providing more cash for working capital management.
Short term working capital management problems can be solved by swapping short-
term debt for long-term debt and putting money allocated for short-term debt into the
generation of profits for paying off long-term debt.

DRAWBACKS OF HAVING A HIGH WORKING-CAPITAL

RATIO

BASICS

A high working-capital ratio may mean that the numerator -- current assets -- is too
high relative to the denominator -- current liabilities -- or that the denominator is too
low relative to the numerator. Companies generally benefit from having low debt
levels. However, if the ratio is too high because one or more of the current-asset
accounts is high, there could be underlying operational issues that require
management attention.

CASH

Cash includes bank deposits, certificates of deposit and short-term Treasury bills. A
small business needs to have a certain cash balance to pay for supplies and other
operational needs. For Example, a consulting company needs cash to pay for rent and
salaries because it may not receive payment until the end of a project. However, a
higher-than-average cash level may indicate that management is unable to find better
uses for the cash, thus limiting the company's return on investment. During
recessions, a high cash balance may be justified because companies are uncertain of
future sales and hold back on major investments. However, during growth periods,
companies are under pressure from owners and investors to make capital investments,
buy back stock or pay dividends.

INVENTORY

Inventory includes raw materials, unfinished and finished goods. Small businesses
need to keep a certain level of inventory to sustain operations and meet customer
demand. However, a higher-than-normal inventory level may indicate declining sales.
For example, a computer-retailer's inventories could become too high if consumers
start buying mobile devices from telecommunications providers. During recessions,

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small businesses may be unable to sell their products quickly, which could lead to an
inventory buildup. In addition, the market value of the inventory may fall below its
book value, especially if the inventory contains obsolete or damaged products.
Therefore, the high working-capital ratio would mask underlying liquidity problems.

RECEIVABLES

A higher-than-normal accounts receivable balance could result in a high

working-capital ratio. High receivables may indicate that customers are delaying
paying their invoices, usually because they are experiencing cash-flow problems. In
this case, a high ratio would not necessarily mean sufficient liquidity because the
company would be unable to convert its receivables into cash quickly. To manage
receivables, small businesses could tighten credit requirements and follow-up on
delinquent accounts. To raise cash quickly, a small business also could sell the
receivables at a discount to a third party, who would then attempt to collect from the
overdue accounts.

CONSIDERATIONS

A company's working-capital ratio is meaningful when compared to some

other standard, such as similar companies in the same industry or its own historical
results. The working-capital ratios vary across industries and companies of different
sizes. A retail store may have a high working-capital ratio because it needs to keep a
certain number of items in stock. On the other hand, a software company may have a
very low ratio because it may not have any inventory, minimal receivables and very
little debt.

METHODS OF WORKING CAPITAL ASSESSMENT

• Operating Cycle Method.

• Drawing Power Method.

• Turnover Method.

• MPBF method (II method of lending) for limits of Rs 6.00 crores and above

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•Cash Budget method - Based on procurement and cash inflow). It is mainly used for
Seasonal Industries (Sugar/ Rice Mills/Textiles/Tea/Tobacco/Fertilizers)
Contractors& Real Estate Developers, Educational Institutions, etc.

OPERATING CYCLE METHOD

Meaning of operating cycle:

It begins with acquisition of raw materials and ends with collection of receivables.

Stages:

1) Raw materials (RM/RM consumption)

2) Work-in-process (WIP/COP)

3) Finished Goods (FG/COS)

4) Receivables (Debtors/Credit sales)

Less:

Creditors (creditors/purchases)

Example of Operating Cycle:

Length of operating Cycle:

a. Procurement of raw material: 30 days

b. Conversion/process time: 15 days

c. Average time of holding of finished goods: 15 days

d. Average collection period: 30 days

e. Total operating cycle: 90 days

f. Operating cycle in a year: 4

g. Total operating expenses per annum: Rs.60 lacs

h. Total turnover per annum: Rs.70 lacs

i. Working capital requirement: 60/4= 15 lacs

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DRAWING POWER (DP) METHOD:

(FOR UNITS WITH SMALL LIMITS)

Drawing power is arrived at on the basis of valuation of current assets charged to the
bank in the shape of hypothecation and assignment, after deducting the stipulated
margin

ILLUSTRATION:

Paid stock – 4 Margin 25% - DP = 3

Semi-finished goods – 4 Margin 50% - DP=2

Finished goods -4 Margin 25% - DP = 3

Book Debts – 4 Margin 50% - DP = 2

Total DP= 10

Turnover Method:

(ORIGINALLY SUGGESTED BY NAYAK COMMITTEE FOR SSI

UNITS)

The WC requirements may be worked out on the basis of Naik Committee

recommendations for working capital limit up to Rs.6 crores from the banking system,
on the basis of minimum of 20% of their projected annual turnover for new as well as
existing units, beyond which WC be computed on the basis of WC cycle, after fixing
stipulated margins, on each component of the WC. In case of borrowers desiring
facilities under Naik Committee recommendations and having a WC cycle of more
than 3 months in a year, the WC requirements will be funded after assessing his
requirements on the basis of his WC cycle, after fixing proper margins.

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EXAMPLE:

Applicable for limits up to Rs.6 crores:

(a) Projected sales = Rs. 10, 00,000

(b) Working capital requirements: 25% of projected sales i.e. Rs.2, 50,000

(c) Margin (contribution of Owner): 5% of projected sales i.e. Rs.50, 000

(d) Working capital to be funded by bank: Rs.2, 00,000

MPBF Method

(Tandon’s II method of lending)

• Working capital gap: Current assets – current liabilities (other than bank
borrowings)

• Minimum stipulated net working capital= 25% of current assets (excluding

exports receivables)

• Actual projected NWC

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