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Working Capital Working Capital ManagementManagement
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WORKING CAPITALWORKING CAPITAL
Current assets – Current liabilitiesCurrent assets – Current liabilities It measures how much in liquid assets a It measures how much in liquid assets a
company has available to build its business.company has available to build its business. A short term loan which provides money to A short term loan which provides money to
buy earning assets.buy earning assets. Allows to avail of unexpected opportunities.Allows to avail of unexpected opportunities. Positive working capital is required to ensure Positive working capital is required to ensure
that a firm is able to continue its operations that a firm is able to continue its operations and that it has sufficient funds to satisfy and that it has sufficient funds to satisfy both maturing short-term debt and both maturing short-term debt and upcoming operational expenses. The upcoming operational expenses. The management of working capital involves management of working capital involves managing inventories, accounts receivable managing inventories, accounts receivable and payable and cash.and payable and cash.
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WORKING CAPITALWORKING CAPITAL
An increase in working capital indicates that An increase in working capital indicates that the business has either increased current the business has either increased current assets (that is received cash, or other assets (that is received cash, or other current assets) or has decreased current current assets) or has decreased current liabilities, for example has paid off some liabilities, for example has paid off some short-term creditorsshort-term creditors..
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Working Capital ManagementWorking Capital Management
Decisions relating to Decisions relating to working capitalworking capital and short term and short term financing are referred to as financing are referred to as working capital working capital managementmanagement. Short term financial management . Short term financial management concerned with decisions regarding to CA and CL.concerned with decisions regarding to CA and CL.
Management of Working capital refers to Management of Working capital refers to management of CA as well as CL.management of CA as well as CL.
If current assets are less than current liabilities, an If current assets are less than current liabilities, an entity has a working capital deficiency, also called a entity has a working capital deficiency, also called a working capital deficit.working capital deficit.
These involve managing the relationship between a These involve managing the relationship between a firm's short-term assets and its short-term liabilities. firm's short-term assets and its short-term liabilities.
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Working Capital ManagementWorking Capital Management
The goal of working capital management is to ensure The goal of working capital management is to ensure that the firm is able to continue its operations and that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational maturing short-term debt and upcoming operational expenses.expenses.
Businesses face ever increasing pressure on costs Businesses face ever increasing pressure on costs and financing requirements as a result of intensified and financing requirements as a result of intensified competition on globalised markets. When trying to competition on globalised markets. When trying to attain greater efficiency, it is important not to focus attain greater efficiency, it is important not to focus exclusively on income and expense items, but to also exclusively on income and expense items, but to also take into account the capital structure, whose take into account the capital structure, whose improvement can free up valuable financial resourcesimprovement can free up valuable financial resources
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WORKING CAPITAL MANAGEMENTWORKING CAPITAL MANAGEMENT
Active working capital management Active working capital management is an extremely effective way to is an extremely effective way to increase enterprise value. Optimising increase enterprise value. Optimising working capital results in a rapid working capital results in a rapid release of liquid resources and release of liquid resources and contributes to an improvement in contributes to an improvement in free cash flow and to a permanent free cash flow and to a permanent reduction in inventory and capital reduction in inventory and capital costs, thereby increasing liquidity for costs, thereby increasing liquidity for strategic investment and debt strategic investment and debt reduction. Process optimisation then reduction. Process optimisation then helps increase profitability.helps increase profitability.
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WORKING CAPITAL MANAGEMENTWORKING CAPITAL MANAGEMENT
The fundamental principles of The fundamental principles of working capital management are working capital management are reducing the capital employed reducing the capital employed and improving efficiency in the and improving efficiency in the areas of receivables, inventories, areas of receivables, inventories, and payables.and payables.
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Why working Capital is important?Why working Capital is important?
Investment in CA represents a Investment in CA represents a substantial portion of total substantial portion of total investment.investment.
Investment in CA and level of CL Investment in CA and level of CL have to be geared quickly to have to be geared quickly to changes in sales.changes in sales.
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Concepts of Working CapitalConcepts of Working Capital
Gross Working CapitalGross Working Capital Net working CapitalNet working Capital
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Gross Working CapitalGross Working Capital
Total Current assetsTotal Current assets Where Current assets are the Where Current assets are the
assets that can be converted into assets that can be converted into cash within an accounting year & cash within an accounting year & include cash , debtors etc.include cash , debtors etc.
Referred as “Economics Concept” Referred as “Economics Concept” since assets are employed to since assets are employed to derive a rate of return.derive a rate of return.
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Net Working CapitalNet Working Capital
CA – CLCA – CL Referred as ‘point of view of an Referred as ‘point of view of an
Accountant’.Accountant’. It indicates liquidity position of a It indicates liquidity position of a
firm & suggests the extent to firm & suggests the extent to which working capital needs may which working capital needs may be financed by permanent be financed by permanent sources of funds. sources of funds.
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CONSTITUENTS OF WORKING CONSTITUENTS OF WORKING CAPITALCAPITAL
CURRENT ASSETSCURRENT ASSETS InventoryInventory Sundry DebtorsSundry Debtors Cash and Bank BalancesCash and Bank Balances Loans and advancesLoans and advances
CURRENT LIABILITIESCURRENT LIABILITIES Sundry creditorsSundry creditors Short term loansShort term loans ProvisionsProvisions
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Characteristics of Current AssetsCharacteristics of Current Assets
Short Life SpanShort Life Span
I.e. cash balances may be held idle for I.e. cash balances may be held idle for a week or two , thus a/c may have a a week or two , thus a/c may have a life span of 30-60 days etc.life span of 30-60 days etc.
Swift Transformation into other Asset Swift Transformation into other Asset formsforms
I.e.each CA is swiftly transformed into I.e.each CA is swiftly transformed into other asset forms like cash is used for other asset forms like cash is used for acquiring raw materials , raw acquiring raw materials , raw materials are transformed into finished materials are transformed into finished goods and these sold on credit are goods and these sold on credit are convertible into A/R & finlly into cash. convertible into A/R & finlly into cash.
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Matching PrincipleMatching Principle
If a firm finances a long term If a firm finances a long term asset(like machinery) with a S-T Debt asset(like machinery) with a S-T Debt then it will have to be periodically then it will have to be periodically finance the asset which will be risky finance the asset which will be risky as well as inconvenient. as well as inconvenient.
i.e. maturity of sources of financing i.e. maturity of sources of financing should be properly matched with should be properly matched with maturity of assets being financed.maturity of assets being financed.
Thus Fixed Assets & permanent CA Thus Fixed Assets & permanent CA should be supported with L-T sources should be supported with L-T sources of finance & fluctuating CA by S-T of finance & fluctuating CA by S-T sources.sources.
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MATCHING PRINCIPLEMATCHING PRINCIPLE
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Need for Working CapitalNeed for Working Capital
As profits earned depend upon As profits earned depend upon magnitude of sales and they donot magnitude of sales and they donot convert into cash instantly, thus there convert into cash instantly, thus there is a need for working capital in the is a need for working capital in the form of CA so as to deal with the form of CA so as to deal with the problem arising from lack of immediate problem arising from lack of immediate realisation of cash against goods sold.realisation of cash against goods sold.
This is referred to as “Operating or This is referred to as “Operating or Cash Cycle” .Cash Cycle” .
It is defined as “The continuing flow It is defined as “The continuing flow from cash to suppliers, to inventory , to from cash to suppliers, to inventory , to accounts receivable & back into cash “.accounts receivable & back into cash “.
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Need for Working CapitalNeed for Working Capital
Thus needs for working capital arises Thus needs for working capital arises from cash or operating cycle of a firm.from cash or operating cycle of a firm.
Which refers to length of time Which refers to length of time required to complete the sequence of required to complete the sequence of events.events.
Thus operating cycle creates the need Thus operating cycle creates the need for working capital & its length in for working capital & its length in terms of time span required to terms of time span required to complete the cycle is the major complete the cycle is the major determinant of the firm’s working determinant of the firm’s working capital needs. capital needs.
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Operating or Cash CycleOperating or Cash Cycle
1.1. Conversion of cash into Conversion of cash into inventoryinventory
2.2. Conversion of inventory into Conversion of inventory into ReceivablesReceivables
3.3. Conversion of Receivables into Conversion of Receivables into CashCash
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OPERATING CYCLEOPERATING CYCLE
Receivables
InventoryCash
Phase 1
Phase 2
Phase 3
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TYPES OF WORKING CAPITALTYPES OF WORKING CAPITAL
PERMANENT WORKING CAPITALPERMANENT WORKING CAPITAL VARIABLE WORKING CAPITALVARIABLE WORKING CAPITAL
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PERMANENT WORKING CAPITALPERMANENT WORKING CAPITAL
THERE IS ALWAYS A MINIMUM LEVEL THERE IS ALWAYS A MINIMUM LEVEL OF CA WHICH IS CONTINOUSLY OF CA WHICH IS CONTINOUSLY REQUIRED BY A FIRM TO CARRY ON REQUIRED BY A FIRM TO CARRY ON ITS BUSINESS OPERATIONS.ITS BUSINESS OPERATIONS.
THUS , THE MINIMUM LEVEL OF THUS , THE MINIMUM LEVEL OF INVESTMENT IN CURRENT ASSETS INVESTMENT IN CURRENT ASSETS THAT IS REQUIRED TO CONTINUE THE THAT IS REQUIRED TO CONTINUE THE BUSINESS WITHOUT INTERRUPTION IS BUSINESS WITHOUT INTERRUPTION IS REFERRED AS PERMANENT WORKING REFERRED AS PERMANENT WORKING
CAPITALCAPITAL..
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VARIABLE WORKING CAPITALVARIABLE WORKING CAPITAL
THIS IS THE AMOUNT OF INVESTMENT THIS IS THE AMOUNT OF INVESTMENT REQUIRED TO TAKE CARE OF FLUCTUATIONS REQUIRED TO TAKE CARE OF FLUCTUATIONS IN BUSINESS ACTIVITY OR NEEDED TO MEET IN BUSINESS ACTIVITY OR NEEDED TO MEET FLUCTUATIONS IN DEMAND CONSEQUENT FLUCTUATIONS IN DEMAND CONSEQUENT UPON CHANGES IN PRODUCTION & SALES UPON CHANGES IN PRODUCTION & SALES
AS A RESULT OF SEASONALAS A RESULT OF SEASONAL CHANGES.CHANGES.
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DISTINCTIONDISTINCTION
PERMANENT IS STABLE OVER TIME PERMANENT IS STABLE OVER TIME WHEREAS VARIABLE IS FLUCTUATING WHEREAS VARIABLE IS FLUCTUATING ACCORDING TO SEASONAL DEMANDS.ACCORDING TO SEASONAL DEMANDS.
INVESTMENT IN PERMANENT PORTION CAN INVESTMENT IN PERMANENT PORTION CAN BE PREDICTED WITH SOME PROFITABILITY BE PREDICTED WITH SOME PROFITABILITY
WHEREAS INVESTMENT IN VARIABLEWHEREAS INVESTMENT IN VARIABLE CANNOT BE PREDICTED EASILY.CANNOT BE PREDICTED EASILY.
WHILE PERMANENT IS MINIMUM WHILE PERMANENT IS MINIMUM INVESTMENT IN VARIOUS CA , VARIABLE IS INVESTMENT IN VARIOUS CA , VARIABLE IS EXPECTED TO TAKE CARE FOR PEAK IN EXPECTED TO TAKE CARE FOR PEAK IN BUSINESS ACTIVITY. BUSINESS ACTIVITY.
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DISTINCTIONDISTINCTION
WHILE PERMANENT COMPONENT REFLECTS WHILE PERMANENT COMPONENT REFLECTS THE NEED FOR A CERTAIN IRREDUCIBLE THE NEED FOR A CERTAIN IRREDUCIBLE LEVEL OF CURRENT ASSETS ON A LEVEL OF CURRENT ASSETS ON A CONTINOUS AND UNINTERRUPTED BASIS , CONTINOUS AND UNINTERRUPTED BASIS , THE TEMPORARY PORTION IS NEEDED TO THE TEMPORARY PORTION IS NEEDED TO MEET SEASONAL & OTHER TEMPORARY MEET SEASONAL & OTHER TEMPORARY REQUIREMENTS.REQUIREMENTS.
ALSO PERMANENT CAPITAL REQUIREMENTS ALSO PERMANENT CAPITAL REQUIREMENTS SHOULD BE FINANCED FROM L-T SOURCES , SHOULD BE FINANCED FROM L-T SOURCES , S-TFUNDS SHOULD BE USED TO FINANCE S-TFUNDS SHOULD BE USED TO FINANCE TEMPORARY WORKING CAPITAL NEEDS OF A TEMPORARY WORKING CAPITAL NEEDS OF A FIRM,FIRM,
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OPERATING OPERATING ENVIRONMENT OF ENVIRONMENT OF WORKING CAPITALWORKING CAPITAL
CHAPTER 2CHAPTER 2
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Monetary and Credit PoliciesMonetary and Credit Policies
Monetary policy is the process by which the Monetary policy is the process by which the govt.,central bank, or monetary authority of a govt.,central bank, or monetary authority of a country controls (i) the supply of money, (ii) country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives of interest, in order to attain a set of objectives oriented towards the growth and stability of the oriented towards the growth and stability of the economy.economy.
Monetary policy is the process by which the Monetary policy is the process by which the government, central bank, or monetary authority of a government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives of interest, in order to attain a set of objectives oriented towards the growth and stability of the oriented towards the growth and stability of the economy.Monetary theory provides insight into how economy.Monetary theory provides insight into how to craft optimal monetary policy.to craft optimal monetary policy.
Monetary policy involves variations in money supply , Monetary policy involves variations in money supply , interest rates , lending by commercial banks etc.interest rates , lending by commercial banks etc.
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Credit PolicyCredit Policy Credit gives the customer the opportunity to buy Credit gives the customer the opportunity to buy
goods and services, and pay for them at a later date.goods and services, and pay for them at a later date. Clear, written guidelines that setClear, written guidelines that set (1) the terms and conditions for supplying goods on (1) the terms and conditions for supplying goods on
credit ,credit , (2) customer qualification criteria (2) customer qualification criteria (3) procedure for making collections , and(3) procedure for making collections , and (4) steps to be taken in case of customer (4) steps to be taken in case of customer
delinquency . Also called collection policy.delinquency . Also called collection policy. Where delinquency means Failure to repay an Where delinquency means Failure to repay an
obligation when due or as agreed. Thus in consumer obligation when due or as agreed. Thus in consumer installment loans, missing two successive payments installment loans, missing two successive payments will normally make the account delinquent will normally make the account delinquent
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Advantages of credit tradeAdvantages of credit trade
Usually results in more customers than cash Usually results in more customers than cash trade. trade.
Can charge more for goods to cover the risk Can charge more for goods to cover the risk of bad debt. of bad debt.
Gain goodwill and loyalty of customers. Gain goodwill and loyalty of customers. People can buy goods and pay for them at a People can buy goods and pay for them at a
later date. later date. Farmers can buy seeds and implements, and Farmers can buy seeds and implements, and
pay for them only after the harvest. pay for them only after the harvest. Stimulates agricultural and industrial Stimulates agricultural and industrial
production and commerce. production and commerce. Can be used as a promotional tool. Can be used as a promotional tool. Increase the sales. Increase the sales.
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Disadvantages of credit Disadvantages of credit tradetrade
Risk of bad debt. Risk of bad debt. High administration expenses. High administration expenses. People can buy more than they People can buy more than they
can afford. can afford. More working capital needed. More working capital needed. Risk of Bankruptcy. Risk of Bankruptcy.
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Instruments of Monetary Policy Instruments of Monetary Policy in Indiain India
Money SupplyMoney Supply Bank RateBank Rate Reserve RatiosReserve Ratios Interest RatesInterest Rates Selective Credit ControlsSelective Credit Controls Flow of CreditFlow of Credit
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Money SupplyMoney Supply
This is the sum total of money public funds This is the sum total of money public funds and can be used for settling transactions to and can be used for settling transactions to buy and sell things and make other buy and sell things and make other payments constitutes the money supply of a payments constitutes the money supply of a nation.nation.
Money supply = Notes and coins with public Money supply = Notes and coins with public + Demand deposits with Commercial papers+ Demand deposits with Commercial papers
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Bank RateBank Rate
Standard rate at which bank is prepared to buy or Standard rate at which bank is prepared to buy or rediscount bills of exchange or other commercial rediscount bills of exchange or other commercial papers eligible for purchase under Reserve bank of papers eligible for purchase under Reserve bank of India Act,1934.India Act,1934.
The rate of interest charged by central bank on their The rate of interest charged by central bank on their loans to commercial banks is called bank loans to commercial banks is called bank rate(Discount rate).rate(Discount rate).
An increase in bank rate makes it more expensive for An increase in bank rate makes it more expensive for commercial banks to borrow . This exerts pressure to commercial banks to borrow . This exerts pressure to bring about the rise in interest rates (lending rates) bring about the rise in interest rates (lending rates) charged by commercial banks on their lending to charged by commercial banks on their lending to public. This leads to a general tightening in economy.public. This leads to a general tightening in economy.
Whereas decrease in bank rate has the opposite Whereas decrease in bank rate has the opposite effect and leads to general easing of credit in the effect and leads to general easing of credit in the economy. economy.
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RESERVE REQUIREMENTSRESERVE REQUIREMENTS
The The reserve requirementreserve requirement (or (or required reserve required reserve ratioratio) is a bank regulation that sets the minimum ) is a bank regulation that sets the minimum reserves each bank must hold to customer reserves each bank must hold to customer deposits and notes. These reserves are designed deposits and notes. These reserves are designed to satisfy withdrawal demands, and would to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in normally be in the form of fiat currency stored in a bank vault(vault cash), or with a central bank.a bank vault(vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country's the monetary policy, influencing the country's economy, borrowing, and interest rates .Western economy, borrowing, and interest rates .Western central banks rarely alter the reserve central banks rarely alter the reserve requirements because it would cause immediate requirements because it would cause immediate liquidity problems for banks with low excess liquidity problems for banks with low excess reserves; they prefer to use open market reserves; they prefer to use open market operations to implement their monetary policyoperations to implement their monetary policy
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RESERVE REQUIREMENTSRESERVE REQUIREMENTS
Thus central bank makes it Thus central bank makes it legally obligatory for legally obligatory for commercial banks to keep a commercial banks to keep a certain minimum percentage of certain minimum percentage of deposits in reserve.deposits in reserve.
These are of 2 types:-These are of 2 types:-
1.1. Cash reservesCash reserves
2.2. Liquidity reservesLiquidity reserves
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CRRCRR
CASH RESERVE RATIOCASH RESERVE RATIO THIS IS DEFINED AS A THIS IS DEFINED AS A cash cash
reserve ratioreserve ratio (or CRR) is the (or CRR) is the percentage of bank reserves to percentage of bank reserves to deposits and notes. The cash deposits and notes. The cash reserve ratio is also known as the reserve ratio is also known as the cash asset ratiocash asset ratio or or liquidity ratio.liquidity ratio.
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STATUTORY LIQUIDITY RATIOSTATUTORY LIQUIDITY RATIO
Statutory Liquidity RatioStatutory Liquidity Ratio (SLR) is a (SLR) is a term used in the regulation of term used in the regulation of banking in India. It is the amount banking in India. It is the amount which a bank has to maintain in the which a bank has to maintain in the form:form:
CashCash Gold valued at a price not exceeding Gold valued at a price not exceeding
the current market price, the current market price, Unencumbered approved securities Unencumbered approved securities
(G Secs or Gilts come under this) (G Secs or Gilts come under this) valued at a price as specified by the valued at a price as specified by the RBI from time to time. RBI from time to time.
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STATUTORY LIQUIDITY RATIOSTATUTORY LIQUIDITY RATIO
The quantum is specified as some percentage of the total The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of which are accruing in one months time due to maturity) of a bank. This percentage is fixed by the Reserve Bank of a bank. This percentage is fixed by the Reserve Bank of India. The maximum and minimum limits for the SLR are India. The maximum and minimum limits for the SLR are 40% and 25% respectively.40% and 25% respectively.
Following the amendment of the Banking regulation Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently the SLR is 24% with effect from 8 was removed. Presently the SLR is 24% with effect from 8 November, 2008.November, 2008.
The objectives of SLR are:The objectives of SLR are: To restrict the expansion of bank credit. To restrict the expansion of bank credit. To augment the investment of the banks in Government To augment the investment of the banks in Government
securities. securities. To ensure solvency of banks. A reduction of SLR rates looks To ensure solvency of banks. A reduction of SLR rates looks
eminent to support the credit growth in India.eminent to support the credit growth in India.
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INTEREST RATESINTEREST RATES
This is generally done by stipulating min. This is generally done by stipulating min. rates of interest for extending credit against rates of interest for extending credit against commodities covetred under selective credit commodities covetred under selective credit control.control.
Also, concessive or ceiling rates of interest Also, concessive or ceiling rates of interest are made applicable to advances for certain are made applicable to advances for certain purposes ao to certain sectors to reduce the purposes ao to certain sectors to reduce the interest burden and thus facilitate their interest burden and thus facilitate their development.development.
Further obj. behind fixing rates on deposits Further obj. behind fixing rates on deposits are to avoid unhealthy competition amongst are to avoid unhealthy competition amongst the banks for deposits and keep the level of the banks for deposits and keep the level of deposit rates in alignment with lending rates deposit rates in alignment with lending rates of banks for deposits. of banks for deposits.
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Selective Credit ControlsSelective Credit Controls
These are Qualitative These are Qualitative instruments which are aimed at instruments which are aimed at affecting changes in the affecting changes in the availability of credit with respect availability of credit with respect to particular sectors of the to particular sectors of the economy.economy.
Thus selective controls are Thus selective controls are called selective because they called selective because they are aimed at movement of credit are aimed at movement of credit towards selective sectors of the towards selective sectors of the economy.economy.
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Selective Credit ControlsSelective Credit Controls
The general instruments such as The general instruments such as Reserve ratios, Bank rate and open Reserve ratios, Bank rate and open market operations.market operations.
They are called so because they They are called so because they influence the nation’s money supply influence the nation’s money supply and general availability of credit.and general availability of credit.
Quantitative instruments are called Quantitative instruments are called quantitative because they affect the quantitative because they affect the total volume(quantity) of money total volume(quantity) of money supply and credit in the country.supply and credit in the country.
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Selective Credit ControlsSelective Credit Controls
The most widely used qualitative The most widely used qualitative techniques are selective control and techniques are selective control and moral suasion.moral suasion.
While the general credit controls While the general credit controls operate on the cost and total volume operate on the cost and total volume of credit , selective credit controls of credit , selective credit controls relate to tools available with the relate to tools available with the monetary authority for regulating the monetary authority for regulating the distrubution or direction of bank distrubution or direction of bank resources to particular sectors of resources to particular sectors of economyin accordance with broad economyin accordance with broad national priorities considered national priorities considered necessary for achieving the set.necessary for achieving the set.
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MORAL SUASIONMORAL SUASION
IT IMPLIES THE CENTRAL BANK IT IMPLIES THE CENTRAL BANK EXERTING PRESSURE ON BANKS EXERTING PRESSURE ON BANKS BY USING ORAL AND WRITTEN BY USING ORAL AND WRITTEN APPEALS TO EXPAND OR APPEALS TO EXPAND OR RESTRICT CREDIT IN LINE WITH RESTRICT CREDIT IN LINE WITH ITS CREDIT POLICY.ITS CREDIT POLICY.
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DETERMINATION OF DETERMINATION OF WORKING CAPITAL WORKING CAPITAL
NEEDSNEEDSCHAPTER 3CHAPTER 3
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Different approaches in Different approaches in determination of determination of working capitalworking capital
Industry norm approachIndustry norm approach Economic modeling approachEconomic modeling approach Strategic choice approachStrategic choice approach
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INDUSTRY NORM APPROACHINDUSTRY NORM APPROACH
THIS APPROACH IS BASED ON THIS APPROACH IS BASED ON THE PREMISE THAT EVERY THE PREMISE THAT EVERY COMPANY IS GUIDED BY THE COMPANY IS GUIDED BY THE INDUSTRY PRACTICE.INDUSTRY PRACTICE.
LIKE IF MAJORITY OF FIRMS HAVE LIKE IF MAJORITY OF FIRMS HAVE BEEN GRANTING 3 MONTHS BEEN GRANTING 3 MONTHS CREDIT TO A CUSTOMER THEN CREDIT TO A CUSTOMER THEN OTHERS WILL HAVE TO ALSO OTHERS WILL HAVE TO ALSO FOLLOW THE MAJORITY DUE TO FOLLOW THE MAJORITY DUE TO FEAR OF LOSING CUSTOMERS.FEAR OF LOSING CUSTOMERS.
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ECONOMIC MODELLING ECONOMIC MODELLING APPROACHAPPROACH
TO ESTIMATE OPTIMUM TO ESTIMATE OPTIMUM INVENTORY IS DECIDED WITH INVENTORY IS DECIDED WITH THE HELP OF EOQ MODEL.THE HELP OF EOQ MODEL.
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STRATEGIC CHOICE APPROACHSTRATEGIC CHOICE APPROACH
THIS APPROACH RECOGNISES THIS APPROACH RECOGNISES THE VARIATIONS IN BUSINESS THE VARIATIONS IN BUSINESS PRACTICE AND ADVOCATES USE PRACTICE AND ADVOCATES USE OF STRATEGYIN TAKING OF STRATEGYIN TAKING WORKING CAPITAL DECISIONS.WORKING CAPITAL DECISIONS.
THE PURPOSE BEHIND THIS THE PURPOSE BEHIND THIS APPROACH IS TO PREPARE THE APPROACH IS TO PREPARE THE UNIT TO FACE CHALLENGES OF UNIT TO FACE CHALLENGES OF COMPETITION & TAKE A COMPETITION & TAKE A STRATEGIC POSITION IN THE STRATEGIC POSITION IN THE MARKET PLACE.MARKET PLACE.
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STRATEGIC CHOICE APPROACHSTRATEGIC CHOICE APPROACH
THE EMPHASIS IS ON STRATEGIC THE EMPHASIS IS ON STRATEGIC BEHAVIOUR OF BUSINESS BEHAVIOUR OF BUSINESS UNIT.THUS THE FIRM IS UNIT.THUS THE FIRM IS INDEPENDENT IN CHOOSING ITS INDEPENDENT IN CHOOSING ITS OWN COURSE OF ACTION WHICH OWN COURSE OF ACTION WHICH IS NOT GUIDED BY THE RULES OF IS NOT GUIDED BY THE RULES OF INDUSTRY, INDUSTRY,
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Determinants of working Determinants of working capitalcapital
General nature of businessGeneral nature of business Production cycleProduction cycle Business cycleBusiness cycle Credit policyCredit policy Production policyProduction policy Growth and expansionGrowth and expansion Profit levelProfit level Operating efficiencyOperating efficiency