278 Corporate Finance
- Nature of business—manufacture against order (e.g., machine tools) or manufacture against anticipated
sales (e.g., soaps), and - Seasonality (of availability).
Accounts Receivable
Goods or services are sold either against advance payment (e.g., airline) or against cash (e.g., fast food) or on
credit (e.g., computers). In the first two cases there is no investment in accounts receivable, but in the third
case a company will have to invest in book debts. Further, the entire sales may not be on credit: a part could
be on cash basis. The extent of credit granted to customers depends on:
- Industry practices,
- Market condition, and
- Quantity purchased by the customer.
While arriving at the average credit period, the transit time should also be taken into account.
Expenses
Normally one month’s expenses (direct and indirect) are included in the working capital requirement to pro-
vide a cushion to take care of temporary bottlenecks. When the operating cycle is relatively short, the provision
may be reduced. Similarly, when the operating cycle is relatively long, the provision may be increased. The
credit available on purchases and advance payment received from customers will have to be deducted from
the working capital as estimated above to arrive at the net required working capital. The working capital
investment in some of the prominent companies (Exhibit 14.2) varies from industry to industry, size, and, of
course, productivity. The format for assessment of working capital is shown in Appendix 3. The working
capital requirement calculated as above will have to be financed from a long-term source (like capital and
borrowings) and short-term borrowings from banks. Banks provide working capital finance by way of advance
against stocks and debtors. They, however, do not provide the full amount and normally insist that the
promoter bring in a margin to ensure that the promoter has a stake in the business. For this reason, what can
be financed and what will be financed do not coincide. The permissible limit of bank finance can be derived
from the working capital requirement (Appendix 4).
Exhibit 14.2 Working capital investment and its productivity in some companies (1998–99 and 1997–98)
Percentage change over
Company W.C. (Rs crore) previous year Net sales/W.C.
Reliance 4194.12 1222.35 243.1 303.8 2.99 9.39
L&T 2004.36 1577.23 27.1 10.2 3.44 3.38
Tata Chemicals 946.72 850.89 11.3 0.3 1.43 1.79
Century Textiles 738.78 806.69 –8.4 4.2 2.59 2.4
Bajaj Auto 667.59 549.45 21.5 46.8 4.55 4.95
Infosys Technologies 472.96 97.23 386.4 79.4 1.07 2.65
Nirma 194.76 281.7 –30.9 39.8 6.27 3.57
Raymond Synthetics 48.97 55.38 –11.6 25.4 7.31 6.48
Source: The Economic Times, Sept. 13, 1999.