Financing of Working Capital in India Industry
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[pic 1][pic 2]Financing of Working Capital in Indian Industry Author(s): V. S. KaveriSource: Economic and Political Weekly, Vol. 20, No. 35 (Aug. 31, 1985), pp. M123-M128 Published by: Economic and Political WeeklyStable URL:
investment in different forms of currentassets may cause shortages and thus bringobstacles in the smooth flow of productionand sales. So a balance has to be struck between these two extreme levels and in this context the review of the position of working capital at different intervals becomes neces-sary. To carry out this review, the balancesheet as a source of information would beof great help.The balance sheet is a statement of posi.tion of assets and liabilities at a point of time. The financial position of the firm isassessed through the study of assets and liabilities. Current assets and currentliabilities are the two major components ofthe balance sheet. Study of the position of gross working capital, i e, current assets, suggests the liquidity position of the firms. These current assets should not only be in liquid form but also be in line with the level of operations. The Tandon Committee sug-3ested norms for inventory and book debtsfor 15 major industries. It is necessary toexamine whether inventory and book debt levels of the firm are as per the suggetednorms. Similarly, study of the position of net working capital, i e, current assets less current liabilities, indicates short termsolvency of the firm. Current ratio of thefirm is the best indicator of the workingcapital position. The ratio should be at least1.0; this is the manimum requirement. Ef-forts should be made to maintain a higher ratio.Items in the balance sheet are interdepen-dent. Hence, if the working capital position is unsound, the total financial position ofthe firm gets ad*ersely affected. To elaborate,if the firm holds current assets more than necessary, it experienceg shortages of longterm assets, provided funds are limited.Similarly, if the long term funds are short of long term assets, short term funds have to be partially used for the long term assets. In such circumstances, the current ratio is unsatisfactory. Thus in the context of balance sheet analysis, the study of working capital position occupies a significant place.Each industrial firm aims at maximising return on investment for which it keeps on acquiring assets and using them for produc-tive uses on a regular basis. When this isdone, it can maintain a steady growth in pro-duction, sales and profits. If profits are con-siderably and regularly ploughed back, it is possible to strengthen the capital base. Con-sequently, dependence on financial institu-tions for working capital in particular and term finance in general gets reduced over a period of time. This view was upheld by thestudy group to frame guidelines for follow-up of bank credit (Tandon Committee) ap-pointed by the Reserve Bank of India in1974. This study suggested three methods for computing maximum permissible bank