"Working Capital"

*   Introduction :

                       Every organisation commercial as well as non-commercial requires some amount of fixed capital for procurement of fixed assets viz. land and building, plant and machinery, furniture's and fixtures, vehicles etc. In addition to fixed capital an organisation requires additional capital for financing day to day activities. Such capital which is required for financing day to day activities is called as working capital. Working capital is required for smooth conduct of business activities. It is the working capital which decides success or failure of an organisation. It is the life blood of an organisation.

                      Shortage of working capital has always been the biggest cause of business failure. Lack of considerable foresight in planning working capital needs of the business has forced even profitable business entities, the so called 'blue-chip' companies, to the brink of insolvency.

                      Working capital is the warm blood passing through the arteries and veins of the business and sets it ticking. New firms wind up for want of working capital. Even gains tumble like pack of cards through the drying up of working capital reservoirs. 

                      Liquidity & profitability are the two aspects of paramount importance in a business. Liquidity depends on the profitability of business activities and profitability is hard to achieve without sufficient liquid resources. both these aspects are closely inter-related. 

                     In this chapter, we shall study the vital aspects such as concepts of working capital, its importance in business activities and decision-making process and calculation of required working capital with practical illustrations.

*   Definitions :

                    Working Capital, like many other financial and accounting terms, has been used by different people in different senses.

                    One school of thought believes, as all capital resources available to a business organisation - from shareholders. bondholders, and creditors (secured and unsecured) - 'works' up in the business activities to generate revenues and facilitate future expansion and growth, they are to be considered as 'working capital'.

                  Hoagland defines working capital as follows :

                  "Working Capital is descriptive of that capital which is not fixed. But, the more common use of working capital is to consider it as the difference between the book calue of the current assets and the current liabilities."

                  Gerestenberg defines working capital as follows:

                  "Circulating Capital means current assets of a company that are changed in the ordinary course of business from one to another, as for example, from cash to inventories, inventories to receivables and receivables to cash."

"Nature & Characteristics of Financial Statements"

*   Nature Financial Statements :

                               Financial Statements are plain statements based on historical recorded facts and figures. They are uncompromising in their objectives, nature and truthfulness. They reflect a judicious combination of recorded fact's, accounting principles, concepts and connections, personal judgement and sometimes and sometimes estimate.
                               Thus, financial statements are affected by three factors i.e., recorded facts, accounting conventions and personal judgement.

1. By recorded facts is meant the data contained in statements, which have been already recorded in accounting recorded.                                                                            Example : Cash in hand and at bank, cost of fixed assets, amounts due from customers and due to suppliers of goods are all recorded facts represented numerically.                                                               
2. Financial Statements are prepared by adhering to certain concepts and established conventions.                  
3. In agreement with the recorded facts and accounting concepts and conventions the role of personal judgement, estimates and opinions, are to be emphasized especially when two or more alternative procedures are available and which are equally acceptable.                        Example : An asset could be depreciated under several methods, and inventory could be valued under different methods. Under such circumstances, personal opinion and judgement play and important role as to which of the methods are in closer conformity with the accounting standards and concepts in a particulars circumstance or case.

*   Characteristics  Financial Statements :

                                       Financial Statements are regarded as indices of an enterprise's performance and position. As such, extreme care and caution should be exercised while preparing these statements. Financial Statements generally reflect the following observable characteristics :

1.   Internal Audience :-

                                 Financial Statements fare intended for those who have an interest in a given business enterprise. They have to be prepared on the assumption that the user is generally familiar with business practices as well as the meaning and implication of the terms used in that business. 

2.   Articulation :-

                               The basic financial statements are interrelated and therefore are said to be 'articulated'.

 Example :   Profit & Loss Account shows the financial results of operations and represents an increase or decrease in resources that is reflected in the various balances din the Balance Sheet.

3.   Historical Nature :-

                               Financial Statements generally report what has happened, in the past. Though they are used increasingly as the basis for the future by prospective investors and creditors, they are not intended to provided estimates of future economic activities and their effects on income and equity. 

4.   Legal and Economics Consequences :-

                               Financial Statements reflect elements of both economics and law. They are conceptually oriented towards economics, but many of the concepts and conventions have their origin in law.

Example :    Conventions of Disclosure and Materiality. 

5.   Technical Terminology :-

                                Since financial statements are products of a technical process called "Accounting", they involve the use of technical terms. It is therefore, important that the users of these statements should be familiar with the different terms used therein and conversant with their interpretations and meanings.

6.   Summarization and Classification :-

                                 The volume of business transactions affecting the business operations are so vast that summarization and classification of business events and items alone will enable the reader to draw out useful conclusions. 

7.   Money Terms :-

                              All business transactions are quantified, measured and related in monetary terms. In the absence of this monetary unit of measurement, financial statements will be meaningless. 

8.   Various Valuation Methods :-

                                       The valuation methods are not uniform for all items found in a Balance Sheet.

9.   Accrual Basis :-

                              Most financial statements are prepared on accrual basis rather than on cash basis i.e., taking into account all incomes due but not received, and all expenses due but not paid.

10.  Need for Estimates and Judgments :-

                                 Under more than one circumstance, the facts and figures to be presented through financial statements are to be based on estimates, personal opinions and judgments. 

Example :   Rate of depreciation, the useful economic life of a fixed assets, provision for doubtful debts is all instances where estimates and personal judgments are involved. 

11.  Verifiability :-

                          It is essential that the facts presented through financial statements are susceptible to objective verification, so that the reliability of these statements can be improved.

12.  Conservatism :-

                          Wherever and whenever estimates and personal judgments become essential during the course of preparation of financial statements, such estimates, should be based moderately on a conservative basis to avoid any possibility of overstating the assets and incomes. 

"Financial Statements"

*   Introduction :-

                          The Financial Statements also called 'Financial Reports' are compilations of balances of different accounts arranged in a
n effective, meaningful order called the Balance Sheet therein can be easily understood, readily interpreted, and used as basis for business decisions by the users of accounting information. The financial statements are studied and used extensively by various parties.
                          The purpose of this chapter is to study systematically the nature and purpose of financial statements and their form and content.

*   Definitions :-

                         The term 'Financial Statements' as used in modern accounting refers to two statements - the position statement reflecting the assets, liabilities and capital of a business entity on a particular date called the Balance Sheet, and the other called the Profit & Loss Account showing the results of business operations during a given period. Sometimes, Profit & Loss Account may also include a separate section to show appropriations of profit.
                         Financial Statements, often referred to as 'the package of financial statements' are supported by various schedules, annexures and footnotes. These supporting schedules and annexures are considered very much a part of the financial statements. The financial statements are summarized reports of accounting transactions. They are prepared for the purpose of presenting a periodic review of the progress by the management.

*   Purposes & Objectives of Financial Statements :-

                           Financial Statements are very useful as they serve varied affected groups having an economic interest in the activities of a business entity. Let us analyse the purposes served by financial statements.

1. Firstly, The basic purpose of financial statements is to communicate to their interested users, quantitative and objective information. This information is useful in making economic decisions.                 
2. Secondly, financial statements are intended to meet the specialized needs of conscious creditors and investors.                                                                                                                                                   
3. Thirdly, financial statements are prepared to provide reliable information about the earning of a business enterprise and its ability to operate at a profit in future. The users who are interested in this information are generally the investors, creditors, suppliers and employees.                                               
4. Fourthly, financial statements are intended to provide the base for tax assessments.                                     
5. Fifthly, financial statements are prepared in a way to provide information that is useful in predicting the future earning power of the enterprise.                                                                                                     
6. Sixthly, financial statements are prepared to provide reliable information that the changes in economic resources.                                                                                                                                                 
7. Seventhly, financial statements are prepared to provide information about the changes in net resources of the organisation that result from profit directed activities.               

"Marketing and The Societal Concept"

*   The Marketing Concept :-

                                 This concept emerged
(even) in the need 1950s. It is a customer oriented philosophy. It puts the consumer both at the beginning and at eh end of the marketing activities. Marketing starts with identifying consumers needs and want's and ends at satisfaction of those wants. Consumers is the center of en tired marketing activities. It takes into account 4 important aspects -
i)   Target Market,
ii)  Customer needs
iii) Integrated Marketing
         And
iv) Profit Admin
 
                              Identifying Target Marketing id necessary for preparing tailor made marketing program. Consumers needs are identify so that they can be satisfying in a better manner. Integrated Marketing is be outcome of all the Departments of the company working together good team work among all functional Departments is necessary for the smoth conduct of marketing activities. The purpose of marketing concept is to help organisation to active there objectives of earning profits by satisfying there consumers. It believes in "Making what can be sold rather than selling what is made."


*   The Societal Concept :-

                                     This concept was involve after 1980s Organizations have relished that it is just not enough to offer want satisfying product to the customers, the society is equally important. The interest of the society should be kept in mind. While tonging to satisfy the consumer. It means our marketing activity should not be at the cost of the society. The marketing manage must consider the interest of different group in the society. For this organisations try to reconsider or balance between 3 objectives of company profit, consumer satisfaction and public interest.
                   

                 It help the company to built a care in image, enhances the reputation and built long term relationship with the society.

"Demand Deposits, Term Deposits & Bank O/D"

A)   Demand Deposits :
It can be sub divided into two categories:

1. Current Account Deposits and
2. Saving account deposits 

1)   Current Account Deposits :-

                                We payable on demand. Current deposits or there are no restrictions on amount and no. of withdrawn is from these accounts the grands no interest on these accounts as it has to keep all cases ready to meet the requirements of the Depositor. This account or general operated by businessman. The bank provided the account same useful services. Such as free collection of outstation cheques.

2)   Savings Accounts Deposits :-
 
                                 This for interest between account but some restrictions on input on depositors from an account without PDS Notice or Restricted.


B)   Term Deposits(Fixed Deposits) :

                                   The Term Deposits are also known as "Fixed Money" on this account accepted for a fixed period and can not be withdrawn before the fixed period. It fully depend upon the period.    

C)   Bank Overdraft :

                                 An old is and advance given by allowing the customer to withdrawn his current account up-to a certain limit. The Overdraft facility is allowed on only current account. The security for old account maybe personal share, Debenture, LIC Policy on Fixed Deposit.    
Calculation of Reconstruction of Investment.
      i) Loan Amount
     ii) Date of Loan taken
    iii) Date of /construction Completed
    iv) End of previous year of "C"
    v) Period of Loan (i - ii)
   vi) Rate of Interest.
  vii) i into v/12 into vi    i.e. (1/5 of vii)
                                        Total cost of construction of Building up Rs. 12,00,000/- For the Assesment year 2012-2013.
  

"Assets & Liabilities OF Commercial Banking"

                             The balance sheet of a commercial bank is a statement of its liabilities and assets at a particular period of time. The liabilities of the bank are those items which are to be paid by the bank to shareholders, depositors and others. The assets of the bank are those items from which the bank hopes to get an income.

•  The liabilities of the bank enable it to undertake its operations. The liabilities include all the amounts due to depositors (deposits) and to shareholders (capital & reserves). The liabilities represent sources of funds.
• The assets of a bank enable it to earn its income. The assets include all the amounts owed by others to the bank. The assets represent application of funds.

      I) Liabilities OF Commercial Banking :-

                          It includes all those items which the bank owes to others. It shows the various sources through which the bank raises funds for its business. They are classified into:

i) Paid Up Capital :-

                           This refers to the contribution made by the shareholders of the bank. This indicates the bank’s liabilities to its shareholders.

ii) Reserve & Surplus :-

                         This is the amount accumulated by the bank over the years out of undistributed profits. This is maintained to meet contingencies. These funds are liabilities of the bank, as they actually belong to the shareholders.

iii) Deposits :-

                                 The deposits are the main source of funds for the banks. The deposits are broadly classified as deposits payable on demand and deposits accepted for a term and hence payable on a specified date. Generally, these deposits are classified as current deposits, saving bank deposits and term deposits. Current Deposits, Saving Deposits, Time Deposits etc.

iv) Borrowing :-

                            They consists borrowings or amount refinanced from RBI, commercial banks and other financial institutions. They also include overseas borrowings made by Indian branches and also borrowings made by foreign branches.

v) Other Liabilities :-

                            These are incurred by the bank during the course of business. They include bills payables such as drafts, traveler’s cheque, pay slips, bankers cheques etc. They also include provision for income tax.

       II) Assets of Commercial Banking :-

                                The assets side of balance sheet consists of all those items which give revenue to the bank. The assets side can be analysed as follows:

i) Cash Balance :-

                           This is the most liquid asset. It enables the bank to meet the demand of customers. By experience the banks know the amount of cash required to meet the demand of the people. They keep certain amount of deposits as reserves with themselves. Cash has 100% liquidity but 0% profitability.

ii) Investments :-

                        Generally commercial banks invest in short term and medium term securities. They prefer government securities as they are safe and marketable. Investments inshares, debentures and bonds are also made by banks. They are highly profitable but have less liquidity. Commercial banks investment are:

1.   Government of India securities,
2.   Other approved securities and
3.   Non-approved securities

iii) Investment in SLR Securities :-

                     The first two types of securities are known as SLR securities. At present the banks are statutorily required to invest 25% of their total deposits in government and approved securities. Government securities include securities issued by both the central and state government agencies and PSUs of state and central government. Approved securities include securities issued by Quasi-Government agencies. These securities are given SLR securities status on case-to-case basis.

iv) Loan & Advance :-

                             The most important asset of commercial banks balance sheet is loans and advances. They form the major part of assets for all the banks. The various types of loans and advances provided by the banks are:

• Cash Credit: Cash credit is sanctioned against a security of commodity stock, property etc
• Overdraft: It is allowed only for current account holders.
• Purchase of discounting bills: It is adopted to finance trade transactions and movement of goods.
• Loans: They are advances for fixed amounts repayable on demand or installments.

v) Other Assets :-

                          They include fixed assets, such as premises which are wholly or partly owned by banks for business/residential purpose, furniture etc.

"Commercial Banking"

*  Introduction :-

                               A bank is a financial institution, which deals with the deposits and advances and other related services. It receives money from those who want to save it in the form of deposits and it lends money to those who need it.

*  Definition :-

                       The Banking Companies Act, 1949 defines a banking company as “a company which transacts the business of banking in any state of India, and the word banking has been defined as accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by Cheque, draft, order or otherwise.”

*  Objectives :-

• To understand the concept and working of commercial banks.
• To understand the functioning of commercial banks in terms of their objectives and to see their exercise in balancing their liquidity and profitability objectives.
• To understand the progress of commercial banks in India since 1991.

*  Functions of Commercial Banking :-

 

There are mainly two Functions of Commercial Banks

1) Primary Function &

2) Secondary Function

     1) Primary Function :-

A) Accepting Deposits :-

                          A Bank accepts deposits from individuals, firms and institutions. These deposits are the main sources of finance / revenue of a bank. The deposits received by bank can be as follows:

i) Saving Bank Deposits :-

                                Savings Bank Deposits are generally kept by salaried persons having fixed income. These accounts can be opened with a small amount. These deposits carry a lower rate of interest than fixed deposits.

ii) Current Account Deposits :-

                                Demand Deposits are generally kept by businessmen, to meet their day-to-day business needs. Money deposited in the current account can be withdrawn in part or full any time. No interest is paid on these accounts. The banks keep almost 100% reserve against these deposits.

iii) Fixed Deposits :-

                           Fixed Deposits are deposits, which are made for fixed period of time which varies from 15 days to 5 years or more. These Deposits carry a high rate of interest. These deposits cannot be normally withdrawn before the expiry of period. If they are withdrawn there will be a loss of interest. At present the rate of interest varies from 5% to 8.5% depending on the time period and the type of bank.

iv) Recurring Deposits :-

                                      In case of such deposits, depositors are encouraged to deposit a specified amount at a regular interval i.e. monthly basis. Interest on these deposits is almost equal to that of Fixed Deposits.

B) Giving Loan :-

                              Banks provide loans to its customers for short and medium- terms. On these loans, the banks charge interest. Banks pay lower rate of interest for the deposits accepted and give loans at a higher rate of interest. The difference between the lending rate and deposit rate is the profit of the bank. But since the bank deals in people’s money, it has to keep some cash ready to meet the withdrawals of the depositors.

i) Overdraft Facilities :-

                         This facility is given to current account holders. Under such facility, the customer is allowed to withdraw excess amount than the amount that is available in his account up to a specified limit. Interest is charged on the excess amount withdrawn.

ii) Cash Credit :-

                                  Cash loan is granted against the security of the goods or personal security of more than one person other than the borrower. Interest is charged on the actual amount withdrawn.

iii) Discounting Bill of Exchange :-

                            Now-a-days people do not wait for the bill of exchange to mature. Banks give loans to people by discounting bills of exchange. When bills of exchange mature banks get back their payment form the person’s who have drawn the bill or who are liable to pay the bills. Banks get commission for discounting the bills.

iv) Fixed Term Loan :-

                               Such loans are generally given for a period of One to Ten years to traders, producers, industrialists etc. If the loan is taken for 5 years or more, rate of interest is higher. If loan is taken for 1 or 2 years the rate of interest is low.

C) Development OF Loan :-

                                      This is also an important function of bank in settling debts. It is more suitable to use Cheques than Cash.

i) Bearer Cheque :-

                        A bearer Cheque can be encashed immediately when presented at the bank by the bearer (any person presenting the Cheque) of it.

ii) Crossed Cheque :-

                       A Crossed Cheque is one in which two parallel lines are drawn at the left hand side corner of the Cheque. Such Cheques cannot be encashed immediately but has to be deposited in the payee’s account in the bank. The amount gets credited in the account.

D) Remittance Of Funds :-

                                  Commercial Banks help in remitting (sending) funds from one place to another by issuing bank drafts, mail transfers, telegraphic transfers etc. by charging some commission.

   2) Secondary Function OR Non Banking Function :-

A) Agency Service :-  

                          Commercial Bank provide a number of service as an agent of customers. These include :

i) Transfers Of Money :-

                                     This is done by means of Cheques, drafts and telegraphic transfers etc. The bank charges a small commission for providing these services.

ii) Executing Orders :- 

                                       Standing orders are performed such as payment of insurance premium, payments of subscription fees of clubs and societies.

iii) Trustee :-

                      Bank also acts as a trustee or executor of will created by its customers. This means undertaking the administration of Estates as Executor or trustee. This includes acquiring and holding and generally dealing with any property right, title or interest in any such property.

B) General Reserves :-

                              Commercial Bank performs a number of general utility service.

i) Safe Deposit Vault :- 

                               Lockers are provided in various sizes on payments on a fixed rent. The lockers are situated in a strong room, generally underground where walls and ceilings are fireproof. The articles kept in the lockers remain in the possession of the locker-holder and the access to the locker is given only after completion of certain formalities.

ii) Letters of Credits :-

                               Letters of credit are issued by commercial banks to help traders to buy goods from foreign countries on credit. It is a document or an order issued by a bank in one place, authorising some other bank in some other place (foreign country) to honour the drafts or cheques of the person named in the document. The payment is limited to the amount shown in the letter and the amount is chargeable to the issuer of the letter of credit.

iii) ATM & Credit Card Facilities :-

                            Automated Teller Machines facilities provide cash easily and quickly 24 hours a day. Credit Card allows a person to buy goods and services upto certain specified limit without immediate payment. Purchases can be made on credit basis. Amount is paid to shops, hotels etc by the bank. The banks collect the amount due from the customers by debiting their account.