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Unit 14: Working Capital Management Practices in India

The payment to creditors in time leads to building up of good reputation and consequently it Notes
increases the bargaining power of the firm regarding period of credit for payment and other
conditions. Projections of cash flows should be made to see that cash inflows and outflows match
with each other. If they do not, either some payments have to be postponed or purchase of some
avoidable items has to be deferred.

Case Study Credit Decision

AGARWAL CASE
n August 30, 2006, Agarwal Cast Company Inc., applied for a $200,000 loan from
the main office of the National bank of New York. The application was forwarded
Oto the bank’s commercial loan department.

Gupta, the President and Principal Stockholder of Agarwal cast, applied for the loan in
person. He told the loan officer that he had been in business since February 1976, but that
he had considerable prior experience in flooring and carpets since he had worked as an
individual contractor for the past 20 year. Most of this time, he had worked in Frankfurt
and Michigan. He finally decided to “work for himself” and he formed the company with
Berry Hook, a former co-worker. This information seemed to be consistent with the Dun
and Bradstreet report obtained by the bank.

According to Gupta, the purpose of the loan was to assist him in carrying his receivables
until they could be collected. He explained that the flooring business required him to
spend considerable cash to purchase materials but his customers would not pay until the
job was done. Since he was relatively new in the business, he did not feel that he could
compete if he had to require a sizeable deposit or payment in advance. Instead, he could
quote for higher profits, if he were willing to wait until completion of the job for payment.
To show that his operation was sound, he included a list of customers and projects with his
loan application. He also included a list of current receivables.

Gupta told the loan officer that he had monitored his firm’s financial status closely and that
he had financial reports prepared every six months. He said that the would send a copy to
the bank. In addition, he was willing to file a personal financial statement with the bank.

Question
Prepare your recommendation on Agarwal Cast Company.

Source: Sudhindra Bhat, Financial Management – Principles and Practice, Excel Books
14.7 Working Capital and Small Scale Industries

Small scale industries have a distinct set of characteristics such as low bargaining power leading
to problems of receivables and lower credit on purchases, poor financial strength, high level of
variability due to dependence on local factors, etc. Consequently, it has been rightly argued that
the industry norms on different current assets cannot be adopted.
The P.R. Nayak Committee that was appointed to devise norms for assessing the working
capital requirement of small-scale industries arrived at simplified norm pegging the Working
Capital bank financing at 20% of the projected annual turnover. However, in case of units which
are non-capital intensive such as hotels, etc. banks often assess requirements both on the Nayak
Committee norms as well as the working cycle norms and take the lower of the two figures.

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