Page 60 - DMGT302_FUNDAMENTALS_OF_PROJECT_MANAGEMENT

Unit 4: Project Budgeting

Margin Money for Working Capital Notes

The principal support for working capital is provided by commercial banks and trade creditors.
However, a certain part of the working capital requirement has to come from long-term sources
of finance. Referred to as the ‘margin money for working capital’, this is an important element
of the project cost.

The margin money for working capital is sometimes utilised for meeting over runs in capital
cost. This leads to a working capital problem (and sometimes a crisis) when the project is
commissioned. To mitigate this problem, financial institutions stipulate that a portion of the
loan amount, equal to the margin money for working capital, be blocked initially so that it can
be released when the project is completed.

Initial Cash Losses

Most of the projects incur cash losses in the initial years. Yet, promoters typically do not disclose
the initial cash losses because they want the project to appear attractive to the financial institutions
and the investing public. Failure to make a provision for such cash losses in the project cost
generally affects the liquidity position and impairs the operations. Hence prudence calls for
making a provision, overt or covert, for the estimated initial cash losses.

Self Assessment

Fill in the blanks:
1. A ....................... for contingencies is made to provide for certain unforeseen expenses and
price increases over and above the normal inflation rate which is already incorporated in
the cost estimates.
2. The principal support for working capital is provided by ....................... banks and trade
creditors.
3. Most of the ....................... incur cash losses in the initial years.
4. The ....................... money for working capital is sometimes utilised for meeting over runs
in capital cost.
5. ....................... expenses are directly related to the project implementation schedule.

4.2 Means of Finance

To meet the cost of the project the following means of finance are available:

1. Share Capital: There are two types of share capital equity capital and preference capital.
Equity capital represents the contribution made by the owners of the business, the equity
shareholders, who enjoy the rewards and bear the risks of ownership. Equity capital being
risk capital carries no fixed rate of dividend. Preference capital represents the contribution
made by preference shareholders and the dividend paid on it is generally fixed.
2. Term Loans: Provided by financial institutions and commercial banks, term loans represent
secured borrowings which are a very important source (and sometimes, the major source)
for financing new projects as well as for the expansion, modernisation, and renovation
schemes of existing firms. There are two broad types of term loans available in India:
rupee term loans and foreign currency term loans. While the former are given for financing
land, building, civil works, indigenous plant and machinery, and so on, the latter are

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