C Working Capital Finance Part1

Working capital finance refers to short-term credit facilities extended by banks to meet the day-to-day operational requirements of a business, such as purchasing raw materials, paying wages, and funding receivables.

It evaluates working capital needs based on sales projections and industry norms.

Gross working capital is the total of all current assets, while net working capital is the difference between current assets and current liabilities, representing the cushion available to meet short-term obligations.

The acceptable number of days inventory, debtors, and creditors are held.

The operating cycle is the time period from the purchase of raw materials to the collection of cash from debtors, encompassing stages of raw material holding, work-in-progress, finished goods, and receivables.

Bank finances 75% of total current assets minus current liabilities.

The Tandon Committee (1975) laid the foundation for bank lending norms in India by introducing the concept of Maximum Permissible Bank Finance (MPBF) and categorizing working capital needs into three methods of lending.

Bank finances 75% of (current assets minus current liabilities), borrower contributes 25%.