Working Capital: Meaning, Types And Financing Sources; Operating Cycle | Management

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TYPES OF WORKING CAPITAL
It is divided into two parts i.e. Permanent Working Capital and Temporary working Capital.

Permanent Working capital Temporary W.C.
It is basically the amount of It is the additional work-
minimum current assets ing capital required from
which are required all the time to time over and
time to ensure a minimum above the permanent
level of uninterrupted bus- working capital
iness operations

Operating Cycle
It refers to the number of days a company takes in converting inventories into cash.

Its formula is:
Operating cycle= Inventory holding period+ Receivable collection Period
Or,
Operating Cycle= Raw material holding period + work in Progress period + finished goods period + receivables collection period.
Net operating cycle
In this we subtract the period in which we as producers pay back to our creditors from the Operating cycle formula.

The formula is

Cash cycle/ Net operating cycle = Inventory holding period + Receivables collection period – Credit payment period
WC Financing Sources
Bank Overdraft: The facility is offered by the banks. Here the borrower is sanctioned an amount which can be utilized as per need and the borrower pays the interest only on the used part of amount.

Working capital loans: They are issued by banks and NBFC’s to finance the day to day operations of an organization.


Trade Credit: When the creditor extends the credit period of the borrower. For example; if a supplier is ok to get a delayed payment.

Bank Guarantee: It is basically a guarantee given by the banks to pay the required amount in case the buyer fails to pay the amount.

Letter of Credit: When the banks issues a letter of credit, the seller sells the goods and gets the payment by the bank and later the buyer pays the payment to the bank




Discounting of bills: When a firm gives goods to debtors on credit, it generates a bill. This bill is shown to the bank and the firm an avail the money at a discount.

Factoring: Selling the debtors to the third party on agreed terms is known as the factoring process.
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