Ashok Kakkar
Quick Summary
Introduction Working capital is often described as the lifeblood of a business. Whether an enterprise is engaged in manufacturing, trading, or providing services, it requires adequate funds to purchase raw materials, maintain inventories, extend credit to customers, pay employees, and meet numerous
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FAQ :
Working capital represents the funds a business needs for its day-to-day operations, covering costs like raw materials, inventory, payroll, and meeting short-term expenses.
Scientific assessment prevents under-financing, which can hinder growth and operations, and avoids over-financing, which can lead to inefficient fund use and increased costs for both the business and the bank.
The operating cycle is the time from purchasing raw materials to collecting cash from customers. A longer cycle means more funds are tied up, thus increasing the need for working capital.
Banks examine audited financial statements, CMA data, GST and income tax returns, stock statements, receivables ageing, bank account operations, and details of existing borrowings, among other financial and operational data.
Common methods include the Operating Cycle Method, the Turnover Method (like the Nayak Committee method for MSMEs), the Projected Balance Sheet Method, and the Cash Budget Method for businesses with uneven cash flows.
Banks may sanction less if sales projections are unrealistic, inventory levels are excessive, receivables recovery is slow, liquidity or profitability is weak, promoter contribution is inadequate, or there are inconsistencies in financial records.
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