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(^416) Financial Management
l Accumulation of finished goods due to non-availability of shipping space for
exports or other disruptions in sales but not under circumstances where a sales
stimulation is needed through reduction in prices.
l Build up of stocks of finished goods, such as machinery due to failure on the
part of purchasers for whom these were specifically manufactured to take
delivery.
l Need to cover full or substantial requirements of raw materials for specific
export contract of short duration.
For the industries, for which no norms have been stipulated banks are expected to keep
in view the purpose and spirit behind the norms exercise and prevent excessive build-
up of inventories receivables.
Working Capital Gap and Bank Finance
The Group has identified working capital gap viz., the borrowerís requirements of finance
to carry current assets (based on norms) other than those financed out of his other
current liabilities, could be bridged partly from his owned funds and long term borrowings
and partly by bank borrowings.
The maximum permissible level of bank borrowings could be worked out in three ways:
(i) Bank can work out the working capital gap, i.e., total current assets less current
liabilities other than bank borrowing and finance a maximum of 75% of the
gap; the balance to come out of long-term funds, i.e., owned funds and term
borrowings.
(ii) Borrower to provide for a minimum of 25% of total current assets out of long-
term funds, i.e., owned funds plus term borrowings. A certain level of credit
for purchases and other current liabilities will be available and the bank will
provide the balance. Total current liabilities inclusive of bank borrowings will
not exceed 75% of current assets.
(iii) Same as (ii) above, but excluding core current assets from total current assets
on the theory that core current assets should be financed out of long-term
funds, i.e., owned funds plus term borrowing.
The three alternatives may be illustrated by taking the following example of a borrowerís
financial position, projected at the end of the next year: