SOURCES OF WORKING CAPITAL

The company can choose to finance its current assets by 1. Long term sources 2. Short term sources 3. A combination of them. Long term sources of permanent working capital include Equity and preference shares, retained earnings, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term means of financing. Financing through long term means provides stability, reduces risk or payment and increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow: 1. Issue of shares: It is the primary and most important sources of regular or permanent working capital. Issuing equity shares as it does not create and burden on the income of the concern. Nor the concern is obliged to refund capital should preferably raise permanent working capital. 2 . Retained earnings: Retain earning accumulated profits are a permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprises. 3. Issue of debentures: It creates a fixed charge on future earnings of the company. Company is obliged to pay interest. Management should make wise choice in procuring funds by issue of debentures. 4. Long term loans: Finance institution and commercial banks provide loans for augmenting long term working capital needs and for meeting additional margin money

requirement for working capital arising but of increasing in volume of operations, expansions, diversification etc. 5. Public deposits / loans: The issue of tapping public deposits is directly related to the image of the company seeking to invite public deposits. Many companies accept deposits as permanent working capital from their members, directors and the general public. 6. Sale of unwanted assets: Amount of working capital can be raised by thesale of unwanted or un utilized assets of land building machinery, furniture, scrap and lose tools etc. 7. Private loans: Lending private institutions or private banks are granting permanent working capital at a fixed rate of intrest against securities to meet the operational expenses. 8. Equipment leasing: Companies get the permanent working capital assistance by offering equipment leasing. Short term sources of temporary working capital Temporary working capital is required to meet the day to day business expenditures. The variable working capital would finance from short term sources of funds. And only the period needed. It has the benefits of, low cost and establishes closer relationships with banker. Some sources of temporary working capital are given below: Internal sources 1. Depreciation: It means decrease in the value of asset due to wear and tear, lapse of time, obsolescence, exhaustion and accident. Depreciation resrves provides a good sources of funds for working capital.

2. Reserves and other funds: Various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital. The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long term sources, whereas the variables working capital should be financed from short term sources.The working capital financing mix should be designed in such a way that the overall cost of working capital is the lowest, and the funds are available on time and for the period they are really required. 3. Taxation provision: According to income tax act firms are liable to pay income tax on the assessable net profit as per late prescribed for the same by finance act from time to time. As such once the net profit of a firm has been ascertained it makes. Provisions out of the said profit for payments of income tax. 4. Accrued expenses: Accrued expenses otherwise known as outstanding expenses. The firm can postpone the payment of expenses for short term periods. This constitutes as a internal sources of medium and short term working capital. 5. Private loans: Lending private institution and private banks are granting medium and short term working capital at a fixed rate of interest against securities to meet the operational expenses External sources.

1. Commercial bank: A commercial bank constitutes significant sources for short term or temporary working capital. This will be in the form of short term loans, cash credit, and overdraft and though discounting the bills of exchanges.

2. Public deposits: Most of the companies in recent years depend on this source to meet their short term working capital requirements ranging fro six month to three years. 3. Various credits: Trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of exchanges, etc helps to raise temporary working capital 4. Loans from directors: A business firm may resort to miscellaneous sources of finance in periods of pressing working capital needs. Such sources may include loans from Directors or sister business unit. 5. Hire purchase and sales: Financial institution and commercial banks grant loans as medium and short term working capital to companies engaged in leasing and hire purchse financing or industrial plant and Machinery or durable customer goods. 6. Govt assistance: Govenment undertakes a variety of promotional activities including subsidies and shortterm working capital assistance for the acquisition and installation of energy conversion equipments. It extends the facility of granting loans, tax consideration for projects involving the development and use of indigenious technology as well as high risk, high return venture. 7. Discounting bills: Companies get the medium and short term working capital assistance by discounting their bill of exchange, promissory notes and hundies from banks. These documents are discounted by the banks at a price lower than their face value.

8. Account receveble financing: Under this arrangements the account receivable of a business concern are bought by a financing company as mondey may be advanced on securing of account receivables. 9. Customer credit: This is also known as instalment credit as it is usually allowed by retailers for selling consumer durable goods. Some portion of the cost price of the asset is paid at the time of delivery and the balanceis paid in number of instalment along with interest. SOURCES OF ADDITIONAL WORKING CAPITAL Sources of additional working capital include the following1. Existing cash reserves 2. Profits (when you secure it as cash) 3. Payables (credit from suppliers) 4. New equity or loans from shareholder 5. Bank overdrafts line of credit 6. Long term loans If we have insufficient working capital and try to increase sales, we can easily over stretch the financial resources of the business. This is called overtrading. Early warning signs include 1. Pressure on existing cash 2. Exceptional cash generating activities. Offering high discounts for clear cash payment 3. Bank overdraft exceeds authorized limit 4. Seeking greater overdrafts or lines of credit 5. Part paying suppliers or there creditor. 6. Management pre occupation with surviving rather than managing.

Working capital refers to the funds needed by a business to conduct its daily operations, such as payment of wages, purchase of raw material, covering overhead costs and offering credit services. Working capital can be subdivided into two areas: regular working capital that provides a steady base for overall business objectives; and short-term working capital used to facilitate the day-today business operations. Sources of finance for working capital include bank loans, retained earnings, credit from suppliers, long-term loans from financial institutions, or proceeds from sale of assets. Long-Term Loans A loan is the amount of money that is given to an individual or a company on the agreement they will repay the amount borrowed in a period that exceeds 12 months and at predetermined interest rates. Long-term loans are usually secured against certain assets and are offered by commercial banks, the government and financial institutions. This type of loan provides the long-term working capital for the business. Short-Term Loans Short-term loans are loans that are to be repaid within a year from the time they are borrowed. Savings banks, cooperatives and the government through the Small Business Administration are some of the institutions that offer these loans. Bank overdraft is one such source of business finance. A bank overdraft is a withdrawal made by a business that exceeds the amount of balance in its bank account, although the amount of money does not exceed a set limit. Line of Credit This is a form of a loan agreement between the bank and the borrower that enables the borrower to acquire some amount of the funds on demand, but the

borrower does not have to take the loan. A business may secure working capital through this service if it has recurring expenses at regular intervals. Trade Credit This credit service offered by suppliers allows businesses to get goods and pay for them later. This is a source of working capital that may be acquired from all suppliers depending on the business arrangements, the type of business you conduct and the worth of the credit to be offered. Asset-Based Financing A business may use its assets to secure working capital from financial institutions that offer asset based loans. The asset includes machinery, vehicle or accounts receivable. Accounts receivable are financial documents of people or companies that owe money to the business and they may be traded in to finance working capital at discounting companies. Inventory Financing These loans are secured with the business` inventory acting as the security. Finance for working capital may be acquired through its inventory although the business cannot sell it until the loan is repaid because the lender has the right to the inventory until the loan has been repaid.