Page 249 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes This selling price per units will be 280 and the dealers will be given 15 percent trade
discount. He calculates that about 50 unit will be needed for “demonstration and display”
in the leading sores at his cost. Although the sales to dealers will be made on one month’s
credit, he knows that the actual collections will be realized in about 4 weeks time. He rules
out cash sales.
Assembling is one of the activity in the production process. Components and materials,
which will be purchased from outside parties strictly on 30 days credit will cost 160 per
unit. Wages per month will be 6000. The production capacity per month will be 220
units. Wages will be paid weekly. Overhead expenses are estimated at 2800 per month.
Materials and components need to be ordered at least one month in advance. There will be
inventory of finished goods or goods in process as the production will be strictly against
firm orders. Bhatt proposes to employ a full-time production, sales supervisor for 880
per month.
Mr. Bhatt wants to know how much finance will be needed for his first six months of
operation and when, so that he may plan accordingly.
Questions
1. Discuss the nature of the financial problem involved.
2. Prepare the monthly cash budget for the first six months period of the proposed
venture.
3. How can the above-mentioned problem be sorted out?

10.7 Summary

 Working capital refers to the funds invested in current assets i.e., investment in sundry
debtors, cash and other current assets.

 The total of investments in all current assets is known as gross working capital.
 Net working capital refers to the excess of total current assets over total current liabilities.
 The important factors Affecting Working Capital are General Nature of Business,
Production Policy, Credit Policy, Inventory Policy, Abnormal Factors and Market
Conditions.

 An optimum working capital ratio is dependent upon the business situation as such and
the nature and composition of various current assets.
 The methods used for in Forecasting Working Capital Needs are: Current assets holding
period, Ratio of sales and Ratio of fixed investment.
 Two important issues in formulating the working capital policy are: What should be the
ratio of current assets to sales and what should be the ratio of short term financing to long-
term financing?
 The different short-term sources available for working capital are Bank credit, Transaction
credit etc.
 Long-term sources of working capital finance are Retained earnings, debentures/bonds
of different types, loans from financial institutions, venture capital financing etc.

 Banks have always been important providers of funds in Indian scenario.

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