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Management of Financing of Working Capital



You all know that working capital is the difference between the current asset and current liabilities. For example current asset is Rs. 5,00,000 and current liabilities are Rs. 1,00,000 and working capital will be Rs. 4,00,000. For operating your business, smooth, you need every time Rs. 4,00,000 in your pocket and fastly this money should be in liquid form, so that you can show your strength in the market. If you have cash and liquid assets are less, it will not your financial strength. But yes, you can double your financial strength if you will learn proper management of Financing of working capital.

You need extra 4 Lack working capital if your working capital has blocked in inventory, debtors and dues to creditors which are near to pay and you have to give cash to them.

At this time, you have to use your skill of financing of working capital.

1. Take loan on your Debtor 

This is short term loan. You go to bank and give the security of your debtors account and say, please give me loan on it. If you have debtor of Rs. 1,00,000 and you get Rs. 60,000 loan at 10% pa, you have to pay just Rs. 6000 interest. So, value of loan which get Rs. 54000 which you can use at this time as financing of your working capital for business need.

2. Take loan on Your Inventory

You can give the promise to bank that my stock will sell in one year and give me loan on the inventory security. Bank will give loan of your inventory on your inventory  Rs. 1,00,000. You get loan Rs. 60,000@ 10% interest and net you will get loan cash Rs. 54000 which can use for business need.

3. Take loan on Your Creditor Account

You say bank, please pay my creditor Rs. 1,00,000 next month, I will pay in the end of this year at rate of interest Rs. 10% pa. Bank is ready and you save your Rs. 90,000 which you can need for your business need.

4. Issue Equity and Finance of Your Working Capital

Your go to share market and say to shareholders. We have good annual net profit as per our financial statements. We have good working capital as per financial statement. For doing business, we need finance on our working capital. Just buy our Rs. 4,00,000 shares and give Rs. 4,00,000 and which we need for business and we give you dividend and business rights. Shareholders are ready and bought his shares.

5. Get More Credit from Other Creditors 

Just show debtors data and say, our money has blocked in debtors account. As we came money from debtors, we will pay your money, give us goods on credit. Now, you have more inventory and you got more potentials to sell and cash it and you got trade credit Rs. 1,00,000

Your Total Working capital financing is

Rs. 54000 + Rs. 54000 + 90000 + 400000 +100000 = Rs. 698000


Reference 

M.Com Financial Management Notes 
Name

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Accounting Education: Management of Financing of Working Capital
Management of Financing of Working Capital
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Accounting Education
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