Page 45 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes bank purchases or discounts the bill and reduces funds by way of crediting to customers
account. The credited amount will be less than the bill amount. At the end of the maturity
period of the bill, bank presents the bill to drawer (acceptor) for payment.

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Caution If the bill is discounted and dishonored by the drawer, then the customer (seller)
is liable to pay the bill amount and any other expenses incurred to bank.
5. Letter of Credit [L/C]: There are two non-hind based sources of working capital, viz., letter
of credits (L/Cs) and Bank Guarantees (B/Gs). These are also known as quasi-credit facilities,
due to non-payment of amount immediately. A Letter of Credit (L/C) is a written document
issued by the Buyer’s Banker (BB) at the request of the buyer, in favour of the seller, where
by the Buyer Banker gives an undertaking to the seller, that the bank pay the obligations
of its customer up to a specified amount, if the customer fails to pay the value of goods
purchased. It helps to bank’s customer to obtain credit from the seller (supplier), which is
possible by assurance of the payment. Thereby, it allows the supplier to extend credit,
since the risk of non-payment is transferred to the BB. Letter of credit facility is available
from bank only for the companies that are financially sound and Bank charges the customer
for providing this facility.
6. Bank Guarantee: A bank guarantee is a written contract given by a bank on the behalf of a
customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of
money in case, if it is not paid by the customer on whose behalf the guarantee has been issued.
In return, a bank gets some commission for issuing the guarantee. Bank offers guarantee in the
form of Bid security, Performance security (< 5 yrs), Advance security & financial security.

Caselet Mahanagar Garments becomes Mahanagar Exports

ank of Baroda (BOB) offers corporations working capital finance to meet their operating
Bexpenses, purchasing inventory, receivables financing, either by direct funding or by
issuing letter of credit. The use of this opportunity was quite smartly made by Mahanagar
garments that used to be a small garment manufacturing firm in Kanpur, UP.
The owner, Mr Kamal Bajaj required a bigger amount of working capital so as to venture
into foreign markets. He got to know about BOB’s funded facilities (funding and assistance
to actually purchase business assets or to meet business expenses) and non-funded facilities
(the bank can issue letters of credit or can give a guarantee on behalf of the customer to the
suppliers, Government Departments for the procurement of goods and services on credit).
He approached the bank authorities, got adequate and timely finance, and converted his
firm from a small garment manufacturing unit into an export house.
Source: business.gov.in

Self Assessment

Fill in the blanks:
1. .......................... of current assets is the responsibility of finance manager.

2. .......................... are the major source of working capital finance to industry and commerce.

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