A Presentation On

Financing Current Assets

NAME- MOHD. ZAHID PERTIAL

CLASS- MBA SEM-II
ROLL NO.- 611
Introduction

Net working capital is the excess of current assets

over and above the current liabilities.
From the above definition the reader can conclude
that a part of the current assets are financed by a
source other than the current liabilities.
This source is long term finance.
Sources Of Financing Current Assets

1. Spontaneous liabilities
2. Trade credit
3. Short term bank finance
4. Public deposits
5. Inter-corporate deposits
6. Short term financial assistance from financial
institutions
7. Commercial paper
Spontaneous Liabilities

This includes (1) Accruals and (2) Provisions

Accruals are liabilities covering expenses incurred on
and prior to a specified date, payable at some future
date.
For example, if a company is following a policy of
paying wages for every wage once per month.
With the change in policy the firm is deferring the
payment of wages for three weeks. Thus, amount of
accrued wages increases because of deferring the
wage payments.
Spontaneous Liabilities(contd.)

Provisions are changes for an estimated expense.

These provisions do not involve immediate cash
outflow.
Cash outflow occurs when the actual amount of
liability is known and paid for.
Examples for provisions are provisions for
dividends, provision for taxes etc.
Trade Credit

Trade credit is the credit extended by the supplier of

goods and services.
On an average, trade credit accounts for nearly 40
percent of current liabilities.
The suppliers generally extend credit based on the
financial soundness of the buyer and the relations
between them.
Bank Finance

The major source for financing current assets is bank

finance. The various ways in which the banks finance
current assets are:
(1) Loan arrangement
(2) Overdraft arrangement
(3) Cash credit arrangement
(4) Bills purchased and bills discounted
(5) Letter of credit
(6) Note lending system
Loan arrangement

Under this arrangement banks credit the entire loan

amount to the borrowers account. In case the loan is
repaid in installments, interest is payable on actual
balance outstanding.
Overdraft arrangement

Under this arrangement the borrower is allowed to

overdraw on his current account with the bank up to
a stipulated amount.
Within this limit the borrower is allowed to make
any number of drawings.
The borrower can make repayments whenever
desired during the period. The interest liability of the
borrower is determined on the basis of the actual
amount utilized.
Cash credit arrangement

In this arrangement borrower can draw up to a

stipulated limit based on the security margin.
This type of arrangement holds good only when the
working capital requirements of the borrower is very
large to the tune of a minimum of Rs 1 crore and the
cash credit is usually allowed against pledge or
hypothecation of goods.
Bills purchased and bills discounted

Under this arrangement a banker purchases or

discounts the bills generated during the credit sales
of goods.
When a bill is purchased or discounted by a banker,
the amount provided is usually covered by the cash
credit and overdraft limit.
Before discounting the bill the bank satisfies itself
about the credit worthiness of the drawer (i.e. seller
of the goods) and genuineness of the bill.
Public Deposits

The deposits mobilized from public by non-financial

manufacturing companies are known as public
deposits or fixed deposits
THANK YOU