42

CHAPTER - Hi
MANAGEMENT OF WORKING CAPITAL

3.1 INTRODUCTION
3.2 MANAGINGWORKING CAPITAL INVESTMENT
3.2.1 Managing Liquidity
3.3 WORKING CAPITAL MANAGEMENT AND PROFITABILITY
3.4 CASH MANAGEMENT
3.4.1 Motives of Holding Cash
3.4.2 Determinants of Cash Balances
3.4.3 Determinants of Cash Flows
3.4.4 Cash Forecasting
3.4.4.1 Receipt and Payment Method
3.4.4.2 Simulation Approach
3.4.5 Managing Surplus Cash
3.4.6 Cash Management Models
3.5 INVENTORY MANAGEMENT
3.5.1 Components of Inventory
3.5.2 Need for Inventory
3.5.3 Cost in Inventory System (Optimizing)
3.5.4 Selective Control Models
3.6 RECEIVABLE MANAGEMENT
3.6.1 Framing the Credit Policy
3.6.2 Executing the Credit Policy
3.6.3 Monitoring Receivable
3.6.4 Strategic Issues
3.7 PAYABLE MANAGEMENT
3.7.1 Determinants of Trade Credit
3.7.2 Cost of Credit
3.7.3 Managing Payables
3.8 FINANCING WORKING CAPITAL
3.8.1 Components of Working Capital Financing
3.8.2 Bank Financing
3.8.3 Short-term Loan Financing
3.9 SUMMING-UP
❖❖❖❖
 43

CHAPTER - III

MANAGEMENT OF WORKING CAPITAL

After analyzing various concepts of working capital in the preceding chapter,

we now move on to Chapter-Ill to discuss the management of various ingredients of

working capital individually

3.1 INTRODUCTION:

Working capital is a critical factor in the sustainability and viability of any

business. Therefore, proper management of working capital is of paramount

importance. The fundamental principle of working capital management is the

availability of right amount of working capital when needed. Working capital needs

are greater for firms that -

(i) have more volatile revenues and cash flows;

(ii) experience higher business and financial risk;

(iii) are smaller and have less access to external financing1.

Earlier, only cash was considered to be the working capital and therefore, maintenance

of adequate cash to meet various short-term obligations was considered to be good

management of working capital but in the present era, working capital management

embodies management of each segment of current assets as well as current liabilities.

Lack of adequate working capital, may lead a business to ‘technical insolvency’

which ultimately forces a firm to liquidate. That is why working capital management

of a firm is considered to be one of the most important task of financial managers.

Working capital management is the process of planning and controlling the

level and mix of current assets of a firm as well as financing these assets. Specially,
 44

working capital management requires financial managers to decide what quantities

of cash, other liquid assets, account receivables and inventories the firm will hold at

any point of time”.2

The objective of working capital management is to maximize the value of

firms by managing the current assets, so that return on investment is equal to or

more than the cost of capital employed.3 The demand for working capital is a derived

demand. The demand for inventory comes from the number of units a firm expects

to manufacture and sell, and expected changes in accounts receivable will reflect

the growth that the firm expects in credit sales.4

3.2 MANAGING WORKING CAPITAL INVESTMENT :

The major policy issue encountered in the management of working capital is

related to levels of investment and its financing. Therefore, it is thought prudent, to

focus first on the components of working capital and liquidity management.

Liquidity is a term used to describe the ease with which assets can be

converted into cash within a period of twelve months during the normal course of

business operation. Current asset includes cash, marketable securities, account

receivable and inventories while current liabilities include account payable, accruals,

tax payable, dividend payable, short-term loans and long-term loans maturing within

a year.

Cash consists of coins, currency, bank deposits, and negotiable instruments

such as money orders, certified cheques, cashiers’ cheques, personal cheques,

and bank drafts. Cash is the most liquid of all assets and it is the medium of exchange

that permits management to carry on the various functions of the business

organization. In fact, the survival of the firm can depend on the availability of cash to

meet financial obligations on time.

 45

Marketable securities consist of short-term investments that a firm purchases

with its idle cash, which can be sold quickly and converted into cash when needed.
Unlike cash, marketable securities provide the firm with interest income.

Accounts receivable includes trade credit and consumer credit. A trade credit
originates when a firm sells goods or services to another firm with an agreement
that cash will be received in some future period. Firms may also sell goods to final
consumers on credit.

Inventories consists of raw materials, work-in-process and finished goods.

(a) Raw materials are inventories waiting to enter into the production
process;
(b) Work-in-process inventories are materials in various stages of
production;
(c) Finished goods inventory are goods whose production process is
completed arid ready for sale. Inventories in retail and wholesale firms
include the merchandise kept for sale.

The magnitude of investment in working capital may increase or decrease

over a period of time depending upon the level of activity. But, there is a need for
minimum level of working capital irrespective of the level of production or sale. Such
a minimum level of working capital is known as permanent current assets or core
current assets. These are usually financed from long-term debt and equity. These
assets are required by the firm to ensure continuity of operation which represents
minimum levels of various items of current assets. Any investment in current assets
over the permanent level is termed as fluctuating current assets. This is the extra
working capital needed to support the changing business activities.

3.2.1 Managing Liquidity:

Other things remaining the same, the greater the firm’s investment in current
assets, the greater is its liquidity, which involves a trade-off, since such assets offer
 46

little or no return. Again other things remaining same, the greater the firm’s reliance

on current liabilities in financing current assets, the lower will be its liquidity.5

Liquidity has two dimension viz., quantitative and qualitative. The quantitative

concept refers to the quantum, structure and utilization of liquid assets.The qualitative

concept implies ability of a firm to meet present and potential demand on cash that

can minimize cost and maximize the value of the firm.

Too much liquidity reduces profitability. It also implies managerial inefficiency,

unjustified expansion and increased speculation. Besides these, it also involves some

cost. A firm can maintain liquidity either by selling/converting assets or by borrowing.

When liquidity is maintained through borrowing, there will be a trade-off between

interest cost paid to creditors and the income earned from the investment in the

assets financed by borrowing.

It is worthwhile to note that both too much and too little liquidity have costs.

Cost of maintaining too much is termed as ‘cost of liquidity’ while maintaining too

little liquid asset is called ‘cost of bankruptcy’.

The cost of ‘excess liquidity’ is the interest on credits and loans used to finance.

investment in liquid assets. It also includes the opportunity cost or profit lost due to

investment in less profitable current assets. The cost of ‘too little liquidity’ is the cost

of additional borrowing needed as well as the loss experienced when assets have to

be sold quickly to meet short-term obligation which may end up in bankruptcy. The

eventual liquidation and realization of assets into cash has two types of bankruptcy

cost - out-of-pocket costs and interest costs.6

The out-of-pocket costs are associated with the bureaucratic procedure of

liquidating non-cash assets and distributing it to the claimants. These costs include

time spent by management with the creditors of the bankrupt firm, legal expenses,

court costs, and advisory fees. On the other hand interests cost of bankruptcy are
 47

costs of compensating creditors ex-ante. The creditors charge a default premium on

interest rates. Besides, loss also occurs as the firm is unable to get or give credit

when demand for its product decreases.

Thus, finance manager must trade-off between the benefits associated with .

liquidity and the cost of maintaining liquidity. Management can optimize this trade­

off by using proper investment and financing policies.

3.3 WORKING CAPITAL MANAGEMENT AND PROFITABILITY :

The liquidity goal is closely aligned with working capital management while

the profitability goal is related to both short-term and long-term decision making.

There exists an inverse relationship between profitability and liquidity. The difficulty

with the dual objectives of profitability and liquidity is that one tends to be a trade-off

of the other. In other words, the decision that tend to maximize profitability tend not

to maximize the chances of adequate liquidity. In order to minimize liquidity risk and

maximize profitability, management can have differing risk attitudes by comparing

the level of current assets against volume of sales or production. These attitudes

could be conservative, moderate or aggressive.

The conservative working capital policy implies that at the given volume of

sales or output the firm has a high level of current assets. This policy prepares a firm

a firm for all conceivable liquidity needs and gives the lowest liquidity risk. However,

it results in lower profitability. On the contrary, aggressive policy refers to maintaining

lower level of current assets. Even though this policy exposes the firm to higher

liquidity risk it yields maximum profitability. Moderate working capital policy is, of

course, in between these two extremes.

To solve the problem of profitability and liquidity risk trade-off, parallel monthly

forecasts of profitability and required borrowings be made.

 48

3.4 CASH MANAGEMENT:

The firm experiences irregular increases in cash balance from several external

sources, such as issue of shares, bonds or sale of fixed assets. These irregular cash

inflows do not occur on a daily basis. Regular.sources of cash inflow from internal

sources arise primarily from collections from receivables and direct cash sales of

goods and services. Many firms also generate cash through the sale of scrap or

obsolete inventory. Cash inflows and outflows are not synchronized. Some inflows

and outflows are irregular, while others are more continual. Business collections do

not coincide with business payments. This does not permit the firm to operate with

extremely low cash balances in actual practice. In practice there is variability and

uncertainty in cash flows.7

The objective of cash management is to ensure availability of cash as per

payment schedule and to minimize the amount of idle cash. Cash management

deals with determining the optimal level of cash, the appropriate types and amounts

of short-term investments in cash as well as the efficient methods and controls of

cash collections and disbursement.8 Efficient cash management is instrumental in

preventing fraud and theft, maintaining right amount of cash, to make necessary

payments and keeping a reasonable balance for emergencies. Holding of cash carries

not only the opportunity cost of profit forgone but also the interest cost on short-term

borrowing. Cash should be held until the marginal value of liquidity it gives is equal

to the value of the interest lost.

3.4.1 Motives for holding Cash :

The motive for holding cash are divided into four main categories transaction,

precautionary speculative and compensating.9

Transaction motive, refers to holding of cash to settle creditors bill, pay salary

and wages to workers, pay duties and taxes etc. The amount to be maintained for
 49

transaction motive depends on the cash inflows and outflows. Further, transaction

demand is related to the volume of transactions. Thus, a firm may keep large amount

of cash during lean period and withdraws it during lean period.

At times, the future cash needs of a firm for transaction purposes are unbertain

because of unexpected increase expenditure, delay in cash collection and inability

to source the materials and other supplies on credit basis. The firm has to protect

itself from such contingencies by holding additional cash. This is called precautionary

motive of holding cash. Generally, cash required for precautionary motive is held in

the form of short-term securities which can be sold when emergency demand for

cash arises. However, there should be a trade-off between the interest revenue and

the transaction cost involved in purchasing and selling such near cash assets.

Speculative cash balance is held to take advantage of yet unknown temporary

investment opportunity which may arise in future suddenly. This is particularly relevant

in commodity sector where prices of material fluctuate widely in different periods.

Further, if a firm wants to take advantage of sudden decline in prices of raw material

they need to hold cash to take advantage of the opportunistic condition. Like

precautionary demands, cash for speculation purposes could be invested in short­

term income earning securities.

Under the compensating motive, banks may make it obligatory to keep a

minimum compensating balance in the firm’s bank account in order to give lending

and other financial services.

3.4.2 Determinants of Cash Balances :

The cash balance that a firm has to maintain is determined by the nature and

size of its business. Some business firms are more cash intensive than others due

to the nature of trade practices or regulatory requirements, (i) Large firms can maintain

lower cash balances, relative to sales, than small firms because they enjoy economies
 50

of scale and greater bargaining power with their banks, suppliers and customers; (ii)

The sophistication level of banking technology and state of financial market

determines the volume of cash balances. In a system where suppliers and vendors

and employees are paid by cheques or ECS and customers pay. in cheques and

credit cards, the firm shall require less amount of cash, than those Who operate only

through cash; (iii) The availability of investments that can be converted into cash at

short notice with low transaction costs will permit firms to maintain and operate with

smaller cash balances;10 (iv) The availability of opportunities for expansion through

mergers and acquisitions, take over determines the volume of cash balances. Firms

which are on the prey require huge cash balances to make successful bids.

As a firm grows, the appropriate working balance will also grow, although

probably not proportionately. The firm many hold excess cash for two principal

reasons (i) The firms cash requirement may vary over the year, if the variation is due

to recurring seasonal factor; (ii) Excess cash may be held to cover unpredictable

financing requirements, competitors act, technology changes, product failure,

occurrence of strikes and lock-outs, down-sizing, corporate restructuring, and

economic conditions may vary. Alterative investment opportunities may suddenly

appear. Thus it may be necessary for a firm to hold excess cash.11 As cash

management technology advances the requirements level of holding cash is

becoming smaller.

3.4.3 Determinants of Cash Flows:

Investment in cash and marketable securities depend on the cash flow of the

firm. The cash flow, in turn is affected by several factors which can be classified into

internal and external factors.

Interna! factors relates to the policies of management relating to working

capital components and future growth plan. It includes;

 51

(i) The increase in purchase activity will demand more cash compared to

other firms which follow order-based production policy;

(ii) If production process is automated, the demand for cash to pay wages

and other expenses will be reduced significantly;

(iii) The management policy to sanction discretionary expenses has a

bearing on cash flows;

(iv) The credit period and cash discount together determine the flow of cash.

(v) The policy of meeting the capital expenditure programme partly out of

internal surplus also put pressure on cash.

(vi) Likewise, the dividend policy of the firm affects cash flow, firms which

follow liberal dividend policy require more cash.

The external factors can be monetary and fiscal factors as well as industry-

related factors. The monetary policy of the Central Bank, declared from time to time,

influences the availability of money. In a liberal monetary policy, it is easy to obtain

credit from banks as well as from suppliers. Similarly the policy and practices of

other firms in the industry also influences the cash flows.

3.4.4 Cash Forecasting:

An understanding of the determinants of cash flows is not sufficient to manage

cash effectively but cash forecasting is the core of cash management. A firm which

is not forecasting cash, either will face unanticipated cash shortage or will have

enough surplus cash which otherwise could have been utilized profitably. Therefore,

cash forecast is inevitable in managing cash.

3.4.4.1 Receipt and Payment Method:

The most usual approach to cash forecasting is the receipt and payment

method. Cash forecasts are normally prepared for one year but the forecast is broken
 52

down to several smaller periods such as quarterly, monthly and weekly. The choice

of periodicity depends on the volume of cash flows and desirability of management.

Under this method a firm forecast various receipts and payments for different

periods.

Monthly Cash Budget

Cash Flow items January February March Total for

the Quarter

Opening Balance of Cash xxx xxx xxx

Receipts
Cash Sales
Collection from Debtors
Total
Disbursement
Suppliers
Salary and Wages
Selling Expenses
Other Overhead Expenses
Total
Less
Excess/Inadequacy xxx
Minimum Balance -XX

Cash Availability xxx

3.4,4.2 Simulation Approach:

Under this method probability distribution for each of the major uncertain

variables such as sales selling price, credit sales, collection rates, etc. are developed,

The values are drawn at random for the variables from their respective probability

distribution and using these values cash balances are estimated. This process is

repeated several times and therefore is solved through computers. The average
 53

cash balance and the standard deviations are used to determine the upper and

lower estimates of cash surplus for each month. In this case, if the degree of

confidence level if taken at 95% the value of Z = 1.645.

Estimated Cash Balance = Average Cash Balance + (Z x Standard Deviation)

For example, if average cash balance of a month is Rs. 3 lakhs and standard

deviation is 33 then at 95 per cent degree of confidence level the upper level of cash

balance will be 30 + (1.645x3.3) = 35.4285. It means there is 5 per cent chance that

the cash balance will exceed Rs.35.4285 lakhs.

3.4.5 Managing Surplus Cash :

Excessive cash balance is the least productive asset of the firm and thus

should be minimized. Normally, a firm invests short-term surplus cash in short-term

liquid securities to earn some interest. The firm has to decide on two issues at this

juncture - deciding on investment avenues and the amount to be invested.

The most typical short-term liquid asset is the government securities. Since

Indian money market is not fully developed, the short-term liquid investments are

restricted to banks and other financial institutions. However, in recent times, the

short-term investment has tilted towards private sector mutual funds, certificate of

deposits, commercial papers and inter-corporate deposits are other popular options.

The amount to be invested depends on transaction cost associated with

investment and the period for which the amount is available. Since return on short­

term securities is generally low, frequent investment and disinvestment increases

transaction cost and thus affects the overall return.

3.4.6 Cash Management Models :

Even though a number of mathematical model have been developed, it is

thought prudent to discuss two important models.

 54

1. William, J. BaumoPs Model -

In this model Baumol establishes trade-off between opportunity or

borrowing cost and the transaction cost. Transaction cost here refers to the.

fixed cost associated with transaction i.e., time spent by accountant.in dealing

with the transaction, the secretarial time and other cost incurred in converting

short-term securities into cash. The optimal cash balance depends the point

of intersection between the opportunity cost and transaction cost. It is shown

\

in figure 3.1.

2. Miller and Orr Model -

This model takes into account the Stochastic nature of cash flows i.e,

varies at each moment of time. They took zero as the lower limit and ‘h’ as the

upper limit of variation, the optimal return point Z can be found out by applying

the formula
( 3r62

v 4c j
where;

r eb average yield of alternative liquid asset

62 = variance of net cash flow

c s cost of each transfer from cash to alternative asset and vice versa.

3.5 INVENTORY MANAGEMENT;

Inventory management refers to the art of managing efficiently and

economically the amount of stock held by a firm in various forms not only to carry on

production on regular basis but also to meet the market demand. Inventory

management covers a large number of issues such as fixation of minimum and

maximum level, determining the size of inventory to be carried, deciding about the

issue price, inspection procedure, determining the economic order quantity, providing
 FIGURE 3.1.A

William J. Baumol Model of Cash Management.

 FIGURE 3.1.B

APPLICATION OF EOQ TECHNIQUE TO CASH MANAGEMENT

Limitation of the Model
♦ The model can be applied only when the payments position can be reasonably assessed.
.. ♦ Degree of uncertainty is high in predicting the cash flow transactions.
♦ The model merely suggests only the optimal balance under a set of assumptions. But
in actual situation it may not hold good.
Miller-Orr Model - The Miller-OrrModel (1966) specifies the following two control
. limits : '
h = Upper control limit
o = Lower control limit
z = The return point for- cash balances
 55

proper storage facilities, keeping check over obsolescence and ensuring control

over movement of inventories.

Due to maintenance of large-sized inventory, a firm commits considerable

amount of funds in inventories thereby jeopardizing the short-term as well as long-.

term profitability. Simultaneously, keeping low amount of inventory hampers production

and marketing. Therefore, the main objective of inventory management is to maintain

the optimum level of inventory.

3.5.1 Components of Inventory :

Inventory is a group of assets with different characteristics. There are four

major components of inventory namely raw material, work-in-process, finished goods

and stores and spares. These are briefly discussed below.

Components:

Raw material inventories are held to make production scheduling easier, to

take advantage of price changes and quantity discounts, and to hedge against short

supply. If raw material inventories were not held, purchases would have to be made

continuously at the rate of production. This would not only mean high ordering costs

and less quantity discounts, but leads to production interruptions when raw materials

cannot be procured in time. Therefore, a firm has an interest in buying enough raw

materials to provide an effective cushion between purchases and production. The

level of raw materials to be maintained depends not only on the extent of co-ordination

between the firm’s purchases and production but also the relationship of a firm with

its supplier. If there is a closer link between the firm and its supplier, a small raw

materials inventory could be maintained and production needs could still be met.

Therefore, the just-in-time inventory system is followed by most of the organizations.

Work-in-progress inventories are needed because there is no perfect

synchronization among production processes - they do not all produce at the same
 56

rate at all times. Each production station needs its own inventory of work-in-process.

Thus work-in-process inventories like the raw materials inventories serve to make

the production process smoother and more efficient - they provide buffers between

the various production process and the more the production stations, the higher will

be the level of work-in-process inventories.

Finished goods inventory. Production and sales are not instantaneous. Firms

cannot produce goods and supply immediately when customers demand goods.

Failure to supply products to customers when demanded would mean a loss of

sales to competitors. The basic objective in holding finished goods inventory is

therefore to separate production and sales operations. Finished goods inventory is

maintained to serve customers on a continuous basis and to meet the fluctuating

demands. The level of finished goods inventories depends upon the extent of

coordination between the firm’s sales and production as well as the efficiency of

firm-customer linkages. If there is a close link between the firm and its customers, it

is possible to know early when goods will be needed, therefore, a small finished

goods inventory could be maintained and customers’ needs could still be met. There

are three motives for holding inventories -the transactions motive, the precautionary

motive and the speculative motive. The transaction motive emphasizes on the need

to maintain inventory in order to facilitate smooth production and sales operations.

Inventory held for precautionary motive guards against the risk of unpredictable

changes in inventory price, demand and supply factors. The speculative motive aims

to take advantage of unpredictable changes in inventory price, its lead times and

variability, and various cost involved in purchasing and holding of inventory.

The stores and spare parts otherwise called purchased components is another

important input for the manufacturing industries. It is a major component of working

capital for many assembly type units. Even though spareparts and tools do not directly

contribute to the final output of the product, still these are necessary to support the
 57

smooth functioning of production process. These are primary equipments used in

machines but they are treated as a part of inventory because of their short-shelf life

and stored along with materials.

3.5.2 Need for Inventory :

The prime reasons for holding inventory can be put into three broad categories

- Transaction motive, precautionary motive and speculative motive. An important

motive for holding inventory is to perform smooth transaction in the production process

and serving the customers demand, since large firms cannot synchronise the arrival

of materials with their customers demand. The purpose of carrying inventories is to

uncouple the operations of the firm, that is to make each function of the business

independent of other function - so that delays or shutdowns in one area no longer

affect the production and sale of the finished product.13

Inventories of raw materials, ensure that the production process is not

disrupted due to shortage of raw materials. Inventories of finished goods arise

because of the time involved in the production process and the necessity of meeting

customer demand without fail. If firms dp not maintain sufficient level of finished

goods, it runs the risks of losing sales, as customers will never wait.

The precautionary motive, on the other hand, aims to reduce the possible

future risk. When a firm buys material from outside, several factors govern the smooth

flow of purchase order. To guard against these risks, a firm needs to maintain some

material. Likewise, there is a risk of plant break-down for manufacturing firms, to

guard against this, a firm must maintain some level of finished goods.

The purpose of speculative motive is to exploit the opportunities that arise

occasionally due to uneven demand and supply. Especially, this holds good mostly

for seasonal products. It is also possible to buy extra materials when the supplier

offers discount beyond certain quantity.

 58

However, the specific reason for holding raw materials and stores are to make

production process easier, to ensure price stability, to hedge against short supply

and to take advantage of quantity discount. Similarly, the purpose of keeping inventory

of finished goods is to ensure smooth delivery schedule, to provide immediate supply

and to achieve economies of scale. On the other hand, the purpose of maintaining

work-in-process is to ensure flexibility in manufacturing and to retain the advantages

of economy of production.

Determinants of Inventory Levels. (1) The amount invested in raw materials

inventory shall depend on - (i) the speed with which the firm can re-stock the raw

materials, the greater the speed, the lower the required investment in raw materials

and vice-versa; (ii) the uncertainly in the supply of the raw materials, the larger the

uncertainly, the higher the required investment in raw materials. (2) The length of

production cycle, the more complex and complicated the production process, the

higher the investment in work-in-process. (3) The amount of investment in finished

goods inventory shall depend on (i) the time it takes to fill an order from a customer.

If orders can be complied with immediately, the firm can maintain a low level of

inventory or vice-versa; (ii) the diversity of the product line - Greater the diversity of

goods, larger shall be the investment in finished goods. Firms with single product

require lower inventory; (iii) the strength of competition - the competition and

competitors strength/weakness determines the level of finished goods that needs to

be stored. If competitors offer close or perfect substitutes within the price range of

the firm, the firm needs to keep sufficient amount of finished goods, but if the products

do not have close substitutes in the market, other things remaining constant, a low

level investment in finished goods will suffice.14

Finding the optimal level of stock in-house trade-off between stock-out costs

and carrying cost. When a stock-out occurs, the firm incurs out of pocket expenses,

opportunity costs and higher costs of scheduling and set up. The relationship between

on time delivery and inventory level is not linear.15

 59

3.5.3 Optimizing the Inventory Cost:

There are five different costs that are associated with inventory. These are;

(i) The value of the inventory itself.

(ii) The cost of acquiring such inventory.

(iii) The cost of carrying inventory in the godown.

(iv) Cost of inventory shortage which is often ignored in the formal analysis.

(vi) Cost of managing the inventory system i.e., cost of developing

information system and people associated with the management of

inventory.

Out of these costs some are directly proportional to the amount of inventory

held while some are inversely proportional to the quantity of stock held. Storage cost

and financial cost of carrying inventory vary directly with the volume of stock. On the

other hand, spoilage, obsolescence and interest cost are related to the period of

holding inventory while ordering cost, set-up cost, freight and payment process vary

with the number of orders.

3.5.1.1 The Economic Order Quantity:

The modern inventory management tries to optimize the level of holding

inventory by making a comparison of cost per unit with the benefit received. The

most efficient method of finding the optimum quantity to be ordered is the Economic

Order Quantity (EOQ). Economic Order Quantity is the optimum size of either a

normal outside purchase order or an internal production order that minimizes total

annual holding and ordering costs of inventory.16 It is the point of intersection between

ordering cost and carrying cost.

The ordering costs include preparation of purchase order, cost of receiving

goods, document processing cost, transportation costs, additional cost of frequent

 60

orders, and set-up and tooling cost associated with each production run. On the

other hand carrying cost encompasses storage cost such as rent, heat, light etc,

storage staffing costs, handling costs, insurance and security costs, pilferage and

damage costs. The graphical determination of economic order quantity is shown in

figure 3.2.

The following formula is used to calculate EOQ :

ECO - J§I
V cs
Where;

A = Annual consumption

B = Cost of Placing an order

C = Cost per unit

S s= Storage and other carrying costs

Let us suppose that the annual demand for an item is 3,200 units. The cost per unit

is Rs. 6 and carrying cost is 25 per cent per annum. If the cost of placing one order

is Rs. 150, then the EOQ will be ;

2x3200x150
= 800 units
f« 25 1
l 100J

3.5.1.2 Re-order Point:

The Economic Order Quantity tells us how much to order in one order but it

does not indicate the timing of the order. It fails to take into account the duration of

the lead time. Depending upon the consumption rate and duration of the lead time,

the consumption during lead time could be lesser, equal or greater than EOQ. So,

place the order when inventory has depleted to lead time consumption level. The

situation is more complicated when lead time consumption is greater than EOQ.17
 FIGURE - 3.2

ECONOMIC ORDER QUANTITY (EOQ)

Behaviour of Costs associated with Inventory for
Charges in Order Quantity
 61

Lets consider a situation where lead time is 60 days and the EOQ can feed

20 days consumption as presented in the following chart.

If purchase starts with only EOQ, the first order to be placed is RrThis will be

received after 60 days and is indicated , by RT, but will suffice only for 20 days

consumption. So, on 20th day another order R2 is to be placed which will be received

at RT2 i.e. to be received on the 80th day. Similarly, on 40th day another order is to be

placed which will be received on 100th day. This process is repeated and from 60th

day onwards, the maximum stock as given by EOQ and the ordering pattern of once

iri 20 days is followed.

Q u a n tity

a
□

DC
h
E

RT, RT2 RT3 R R' RT„ RT, RT„

[ Relationship between Lead time Consumption and EOQ ]

3.5.4 Selective Inventory Control Models :

Carrying too much or carrying too little of inventories is detrimental to the

firm.Therefore, an efficient inventory management requires to maintain an optimum

level of inventory. In order to achieve this objective a firm should calculate various

block levels.

1. Reordering Level: This level is fixed between maximum level and minimum

level after taking into account the rate of consumption, number of days required to

replenish the stocks and maximum quantity required for any day.

Re-ordering Level = Maximum Consumption x Maximum Recorder period

 62

2. Maximum Level : It is that level of stock beyond which should not keep its

stock. It is calculated after taking into account the availability of capital, maximum

requirement, space availability, rate of consumption and nature of material,

Maximum Level = ROL + ROQ (Minimum consumption x -

minimum reorder period)

3. Minimum Level

It represents the quantity which must not be maintained in hand at all times,

it is calculated after considering the lead time, rate of consumption and nature of

material.

Minimum Stock Level = Reordering Level - ( Normal consumption x

Normal reorder period)

4. Danger Level

It is the level beyond which material should not fall in any case. If the level of

material touches or falls danger level stocks should be procured immediately at any

cost. It is calculated by applying the following formula.

Danger Level = Average consumption x Maximum recorder period

for emergency purchases

5. Safety Stocks

It is a buffer stock to meet some unanticipated increase in usage. As future is

uncertain demand for material may fluctuate which may cause the problem of stock­

out. Since stock-out becomes costly, firms usually maintain some margin of safety.

Two costs are involved in the determination of this stock - the opportunity cost of

stock-out and the carrying cost. By leveraging these two costs a firm should maintain

buffer stock ip order to protect against the stock-out arising out of usage fluctuations.

3$ RECEIVABLE MANAGEMENT:

“Buy now, pay later”, philosophy has gained currency among the Indian

customers. As a result, investment in accounts receivables is increasing year after

year, though it varies from industry to industry. The benefit of offering credit differs
 63

across businesses. It is large for high-priced products and less for inexpensive items.

Offering to sale on credit involves two costs. The first cost is the possibility of loss

due to default in payment and the second cost is the interest foregone between the

time of the sale and the time of payment. Liberal credit terms may be expected to

generate large volume of sales, but they increase the potential costs as well. Besides '

the costs of investment, two risks are associated with accounts receivable

management - opportunity loss and liquidity risk. Opportunity loss refers to loss of

sale (profit forgone) by refusing crediting to the potential customers, who may shift

to competitors, while liquidity risks relates to the ability of the business firm to collect

the amount due from its customers as agreed upon. The importance of accounts

receivables depends upon the degree to which the firm sells on credit. Since cash

flows from a sale cannnot be invested until the account is collected, efficient collection

and control of receivables determines both profitability and liquidity of the firm.19

The size of investment in accounts receivables is determined by the following

factors. They are as follows :

(i) The percentage of credit sales to total sales, which again depends on

the nature and size of the business,

(ii) The level of sales determines the size of investment in accounts

receivable. More the sales, greater will be the investment. Firms with

permanent growth in sales shall have to continually increase investment

in receivables (working capital).20

(iii) The third factor that influence the levels of investment in receivable are

the credit and collection policies of the firm. This will also cause an

impact on the level of sales and the ratio of credit sales to total sales.

The firm credit policy will influence - i) the volume of sales ii) the

investment level in inventories, accounts receivables, cash, and also

fixed assets (iii) bad debts and collection costs.

 64

The receivable management is studied under framing the credit policy;

executing the credit policy and monitoring receivables.

3.6.1 Framing Credit Policy:

For efficient management of receivables a firm must adopt a clear-cut credit

policy which is concerned with decision regarding credit standard, length of credit

period, cash discount and the period of discount.

A liberal credit policy tends to increase sales hence profit. Simultaneously it

increases the loss due to bad debt and extra cost of managing credit sales. Therefore

a finance manager has to match the increased revenue with additional cost. For this

reason the following points need careful attention.

• The optimum level of investment in receivables is achieved at a point where

there is a trade-off between cost, profitability and liquidity;

• A firm, while framing credit policy must take into account the credit policy

followed by its competitors;

• The length of the credit period and rate of discount depend on the magnitude

of investment in receivables;

• While allowing discount, the finance manager must compare the earning

resulting from released funds and the cost of discount.

3.6.2 Executing Credit Policy :

The first step in implementing credit policy is to gather credit information

about the customers. Such information can be available from financial statements,

credit rating agencies, report from banks and from firm’s record.

After gathering information, the finance manager should analyses it to find

out the credit worthiness of the potential customers. Credit analysis determines the

degree of risk associated with the accounts, capacity to borrow and willingness to

pay.
 65

Then, the volume of credit to be granted is to be determined taking with

account the capacity of the customers. And finally, the finance manager should make

effort to get receivables financed so that working capital needs are met in time.

Generally, banks supply 60 to 80 percent of the amount of receivables as loan against

their security. The quality of receivables determines the amount of loan.

3.6.3 Monitoring Receivables:

Framing and executing the credit policy is not all in managing receivables. It

is necessary to ensure that customers make payment as per credit term. Customers

generally deviate from payment terms because of

(i) Economic slow down of the industry;

(ii) Inaccurate forecast and defective credit policy;

(iii) Overestimation of collateral values.

(iv) Improper policy implementation i.e., accommodating special request of

the customers.

Monitoring provides signals of deviation from expectation. Monitoring system begins

with aggregate analysis and then move down to account-specific analysis.

Various techniques are followed to monitor the receivables these are;

1. Assessments of investments in receivables as a percentage of total assets.

Investment In Receivables
--------- —_---------------- - x 100
Total Assets

Then compare the calculated percentage with the policy framed. A higher

percentage indicates that some customers are not paying and/or managers

are granting more credit or extending the credit period which require an

investigation.

2. Comparison of receivable and sales for different periods to know the trend.

This can be done by computing the collection period of two periods.

 66

Accounts Receivables
Collection Period
Credit sales per day

If customers are granted different credit periods, collection period should be

calculated separately for each group of customers having similar natures.

3. Ageing Schedule : In this method debtors are classified on the basis of

number of days outstanding. Now-a-days, the public limited companies

disclose the debtors which are outstanding for more than six months in their
annual reports. After classifying the debtors, the percentage of (more than

six month) to total receivables is calculated. Then further investigation in the

form of break-up details would help to initiate corrective steps.

4. Conversion Matrix : Here, credit sales of each month are patterned as per

their collection. This shows how credit sales of a month are collected in the

subsequent month. It reveals the laxity or otherwise of the collection

department.

Credit sales of different months are presented in the first column. How these

are collected in the subsequent months are shown along the horizontal row

against that month. The entire piqture looks like a matrix.

3.6.4 Strategic issues:

Management of receivables being a crucial issue, manager should take note

of the following critical points.

• Credit term, being an economic issue, must be supportive to sell large sales
volume;
• A firm should allow longer credit period to those who buy large quantity;
• Additional cost of investment should be compared with the benefit received.
• A firm may pursue liberal credit term initially when it plans to enter into a new
segment and should withdraw later on;
 67

• Firms with a large market share in low growth industry should not invest

additional capital in receivables;

• A firm should develop various scenarios and study their impact on the overall

organization goal;.

• Firms dealing with a large number of customer may start a separate subsidiary

to manage receivables. It is also possible to go for factoring services and

credit rating agencies to out-source these services..

3.7 PAYABLE MANAGEMENT:

Payable constitute short-term liabilities representing buyer’s obligation to pay

a certain amount in near future for value of goods and services received. They are

the short-term deferment of cash payments that is allowed by the seller.Trade credit

is given in connection with goods purchased for resale or for processing and resale,

hence excludes consumer credit provided to ultimate individual users. It is usually a

non-interest bearing source of funds. Payables could be of three types - open account,

promissory notes and bills payable. Open credit or open account is an informal

arrangement between the buyer and seller whereas in promissory note the buyer

promises to pay a certain amount by a certain date. On the other hand, in case of

bills payable the instrument is drawn by the seller and accepted by the buyer.

3.7.1 Determinants of Trade Credit:

The quantum of credit and the period of credit are influenced by the following

factors:

(i) Size of the Firm : The larger firms are less vulnerable to adverse turns in

business and can command prompt credit facility but smaller firms find it

difficult to obtain alternative sources of finance due to weak financial position.

(ii) Nature of Product: The products with higher turnover may need short-term

credit while products with lower turnover take longer time to generate cash

flows hence need extended credit terms.

 68

(iii) Seller’s Financial Status: Financially weak suppliers would like to have higher

credit terms than the financially strong suppliers. Further, the financially

stronger firms can afford to extend credit to smaller firms and assume.higher

risks. Moreover, suppliers with working capital crunch may offer higher cash

discount to encourage early payment.

(iv) Credit worthiness of the Buyer : The buyer should not expect liberal credit

term from the small suppliers. On the contrary, if the buyer is rich and repaying

at regular intervals, credit term may be liberal. But slow paying or delinquent

accounts may compel to follow strict credit term or higher prices for product

to cover risk.

(v) Cash Discount: Cash discount influences the effective length of credit. By

providing cash discount the supplier pan save the cost of administration

connected with keeping record of dues and collecting overdue accounts.

(vi) Dating : Sellers use dating to encourage customers to place orders before a

heavy selling period especially for consumer durable. This has twin

advantages; the seller can schedule his production more conveniently and

the buyer will not pay for the goods until the peak selling period.

(vii) Other Factors: Among other factors, the trade credit depends on the term of

sale degree of risk, extent of competition and the nature of industry.

3.7.2 Cost of Credit:

The credit term is a built-in source of financing that is normally linked to

production cycle of the purchasing firm. If payments are made within the credit period,

the cost of trade credit is either borne by the seller or it passes on to the buyer by

increasing prices. But where buyer takes the privilege of delaying payment beyond

the due date, trade credit becomes more costly.

The supplier may offer cash discount for payment within a specified number

of days after the invoice or after the receipt of goods. It may also offer trade discount
 69

and quantity discount. Trade discount is a reduction from the list price offered to the

dealer in the channel of distribution whereas quantity discount is given when

purchases are made in sizeable lots.

Stretching trade credit results two types of cost to the buyer. One is the cost-

of cash discount foregone and the other is the consequence of a poor credit rating in

which the credit reputation may be lost.

When cash discount is allowed for payment within a specified period, cost of

credit can be calculated by using the following model.

C 360
Ctr D X (100-C) x 100

Where;

Ctr = Cost of trade credit

C = Rate of cash discount

D s* Number of extra days the customer has the use of suppliers fund

Let’s suppose that the credit term is one per cent for payment within 10 days with 60

days credit period. Then the cost of trade credit will be -

32 360
Ctr 50 X 98 x 100 = 14.7%

This will be compared with the bank rate. If suppose bank’s borrowing rate is

11 per cent, it is advisable to avail cash discount.

3.7.3 Managing Payables:

Since payables management involves cost, the following things should be

kept in mind while managing them.

• A firm should negotiate and obtain the most favourable credit term;

• If cash discount is offered, the firm should calculate the cost of credit and

compare it with the bank rate and take decision accordingly;

• When cash discount is not offered settle the account just on the date of

maturity and not earlier;

 70

• Stretching payables beyond due date may affect credibility hence a firm should

be very careful about it;

• A firm should keep a good track record of past dealing with the supplier;
i ’ 1

• Finally, a constant watch should be made into payables by classifying them

on the basis of their age.

3.8 FINANCING WORKING CAPITAL :

After dealing with receivable management, an attempt is made hereunder to

discuss the sources of financing current assets. The trade-off between risk and return

which occurs in the policy decisions regarding the level of investment in current

assets is equally significant in the policy decisions on the relative proportions of

finance of different maturities in the balance sheet, i.e, on the choice between short

and long term funds to finance working capital. Current assets are not purchased all

at once but grow gradually and irregularly over time.21 Permanent current assets

represent the core level of investment needed to sustain normal levels of trading

activity, and temporary current assets represent the variations in the level of.assets

arising from the normal business activity.22

3.8.1 Components of Working Capital Financing :

Investment in working capital can be financed by internally generated fund or

by borrowing from outside. The major sources of short-term finance include trade

credit, accruals, short-term bank loans, collateral papers, commercial papers and

factoring accounts receivables. These are discussed briefly under the following

paragraphs.

Unlike credit from financial institutions trade credit does not rely on formal

collateral but on trust and reputation. It creates accounts payable. It depends on the

purchase policy followed by a firm. Generally, there are three forms of trade credit
 71

viz; open account system, promissory note and trade acceptance. Open account

system is followed when debtor’s credit-worthiness is fair and the value of the

transaction is not too large. But in the absence of these two the debtor writes a letter

of I.O.U. in favour of the creditor which is called promissory note. On the, other hand,

trade acceptance is a supporting letter written by a bank addressed to the creditor

guaranteeing debtor’s credibility with regard to a specific transaction.

Accruals are short-term non-credit obligations. It represents an interest free

source of financing. The most common accrual accounts are wages and taxes. The

longer the payment intervals, the greater is the amount of accrual funds. Although

firms do not have much control over the frequency of payment of faxes, it is still an

important source of accrual financing.

Banks provide short-term credit to finance working capital either with security

or without security. Besides this, a business can draw excess money in the form of

overdraft for a shorfcperiod. Similarly, a firm can pledge its non-cash current assets

as collateral security while borrowjng mpney. Thus, borrowing can be made by

pledging marketable securities, receivables or inventories.

Commercial paper is usually short-term unsecured debt security sold by larger

firms.24 It can be effectively used to finance short-term investments. Sometimes

banks guarantee the issue of commercial papers which makes it obligatory for the

bank to pay if the issuing firm fails to pay.

Factoring account receivables is another form of borrowing funds from a factor.

The factor takes over the firm’s credit granting function and the firm sells the face

value of its account receivables to the factor. The factors pays the amount after

discounting these for service charge and interest.

 72

3.8.2 Bank Financing:

In order to provide greater freedom in assessing working capital requirement

of the borrower banks were instructed to evolve their own method in financing working

capital needs Banks generally follow the following methods.

(i) The maximum working capital finance limit is generally fixed at 75 per cent of

the current assets, or 75 per cent of the difference between current asset and

non-bank current liabilities;25

(ii) Current ratio of the firm is used as an indicator to finance working capital. The

acceptable current ratio is the ratio of bank funds to own funds;

(iii) Bank finance is also sometimes based on the periodic cash flow statement of

a firm;

(iv) While lending banks should consider the RBI instructions relating to.

♦ Direct credit such as priority sector;.

♦ Quantitative limit t on lending against shares and financing for consumer

durable;

♦ Prohibition of credit such as bridge finance, rediscounting of bills earlier

discounted by NBFC.

3.8.3 Short Term Loan Financing :

The short and long-term financing sources have differing effects on the trade­

off between profitability and liquidity risk. For the purpose of working capital financing,

profitability of short and long-term debt is considered from the point of view of interest

cost. The higher the interest cost the lesser the profitability and vice-versa. The long­

term loan has, in general, higher interest charge compared to a short-term loan due

to the risk involved in lending for a longer period of time. Short-term loans are more

risky from borrowers point of view, because of the problem of getting cash in the

short-term, there is greater variability of interest rates as compared to that of the

 73 .

long-term loans. The long-term loans are more expensive but less risky, while short­

term loans are more risky but less expensive. Therefore, management must workout

an optimum point between the two. The short-term credit, particularly supplier credit

is positively correlated with capacity utilization because firms lacking credit face

inventory shortages leading to lower capacity utilization. Even in the United States

of America with extremely well developed financial markets, trade credit is the largest

single source of short-term financing. In developing countries where formal lenders

are limited, trade credit plays an even more significant role in funding firm’s activities.

Generally, temporary current assets are financed with short-term loans and

the permanent current assets with long-term debt or equity capital. However, the

actual investment and financing mix match-up depends on management’s approach

towards risk and profitability. Based on the interest cost and liquidity risk, management

can use maturity matching, conservative, or aggressive approaches to financing

working capital investments.

The maturity matching approach to working capital takes into account the

maturity structure of the firm’s assets and liabilities. The maturity structure of the

firm’s liability is made to correspond exactly to the life of its assets by matching

current assets life and balancing it with that of current liabilities, so that each asset

is offset with a financing instrument of the same maturity. Temporary current assets

will be financed with current liabilities while the permanent portion of current assets

and fixed assets are financed with long-term debt and equity capital. This financing

approach suggests that apart from the current portion of long term debt, a firm

would need no short-term borrowings when sales are low. As the firm needs to

meet seasonal assets, it borrows on the short-term and later it pays off the borrowing

with the cash released by the decrease of current assets when sales are again low.
 74

Risk taking in search of higher profits requires an aggressive approach using

the less costly but more risky short-term debt. This means financing a portion of the

permanent current assets and all temporary current assets with short-term debt.

This, approach puts the firm at a considerable risk of technical insolvency..The

frequency of refinancing the short-term debt increases the risk and the firm will be

unable to obtain new financing when need arises. However, there is a better chance

for the firm to earn a high rate of return, because interest on short term debt is less

costly.

The third option of financing working capital investment requires a conservative

approach to risk and profitability. Under this approach all the fixed assets and

permanent current assets as well as a certain portion of the temporary (or fluctuating)

current assets are financed with long term debt and equity capital. This puts the firm

at a minimum risk of not being able to reschedule its short-term debt. However, the

firm will have little opportunity to earn a premium rate of return due to the excessive

interest on long-term debt.

3.9 SUMMING UP;

Working capital management refers to planning, managing, controlling,

financing as well as determining the mix of current assets with the objective of

maximizing the value of the firm.

Various components of current asset in public enterprises are cash, marketable

securities, account receivable and prepaid expenses. While various constituents of

current liabilities are account payable, accruals, tax payable, dividend payable, shor-

term loan and long term loan maturing within a year.

Cost of keeping too much current asset is termed as cost of liquidity which

reduces profitability. The cost of maintaining too little current asset is termed as cost

of bankruptcy. Therefore, the finance manager must trade-off between the benefit
 75

associated with liquidity and the cost of maintaining it by making proper investment

and financing policies.

A firm’s motive to hold cash comes from transaction motive, precautionary

motive, speculative motive and,compensating motive. Generally, the requirement of

■ ’ *. ' _)
cash depends on the purchase activity, production process, credit period to and by

the firm, policy of managing capital expenditure etc. Therefore, cash requirement is

to be predicted very carefully either by preparing cash budget or by simulation

approach or by following certain cash management models.

Inventories are found generally in the form of raw material, work in process,

finished goods and stores. Reasons for maintaining inventory comes from transaction,

precautionary and speculative motive. Inventory cost comprises of the cost of

inventory, ordering cost and carrying cost. These cost are to be kept at the minimum

by calculating Economic Ordering Quantity, Reordering Point and different stock

levels in order to increase profitability.

Receivable management has assumed added importance, because besides

the cost of investment two risks are associated with it i.e.; opportunity loss and

liquidity risk. Therefore, careful framing of credit policy, executing the credit policy

and monitoring receivables are of paramount importance. A firm should compare

the additional cost of investment with the benefit received besides having an eye on

the competitors’ policy and attitude.

The payable - a non-interest bearing source of funds are found in three forms

i.e., open account, promissory note and bills payable.Trade credit received by a firm

depends on the size of the firm, goodwill, credit worthiness and sellers financial

status. When cash discount is offered the firm should calculate the cost of.credit and

compare it with the bank rate and decision is to be taken accordingly. Stretching

payable by due date may affect credibility. Hence a firm should be watchful. Moreover,
 76

constant watch on payables should be made by classifying them on the basis of

their age.

Investment in working capital can be financed either by internally generated

funds or by borrowing loan outside. Major sources of working capital finance are

short-term bank loan, collateral papers, commercial papers and factoring accounts

receivable. Banks allow short-term credit based on the periodic cash flow statement,

current ratios and other factors. The maximum working capital finance limit is generally

fixed at 75 per cent of current asset or 75 per cent of difference between current

asset and non-bank current liability.

 77

REFERENCES
...............T..... ...... ....T~ ........ . ......... ........

1. Aswath Damodaran. Corporate Finance, Theory & Practice, Willey Student

Edition, New York, 2005, 2nd Edition,-401.

2. Archer, Stephen H, Choate, G. Mare, & .Recettee George. Financial

Management, Lohn Willey & Sons, New York, 1983, P-152.

3. Kolp, Burton A. Inclusive Texas, 1983, P-152.

4. Aswath Damodaran. Corporate Finance, Theory & Practice, Willey Student

Edition, New York, 2005 2nd Edition, P-392.

5. Krish Rangarajan & Anil Mishra. Working Capital Management, Excel Books,
New Delhi, 2005 1st edition P. 5-6.

6. Van Horne, J.C. Financial Management and Policy Prentice Hall, 1988.

7. Kris Rangarajan & anil Mishra. Working Capital Management, Excel Books,
New Delhi, 2005, First Edition, P-134.

8. Scherr, F.C. - Modern Working Capital Management, Text & cases, Prentice
Hall International Edition, 1989. New Jersey.

9. Ross, S.A., Westerfield, R.W., Jaffe, J.F., Corporate Finance, IRWIN,. 1996,
Boston Mass.

10. Aswath Damodaran, Corporate Finance, Theory & Practice, Willey Student
Edition, New York, 2005, 2nd edition.

11. Krish Rangaranjan & Anil Mishra, Working Capital Management, Excel Books,
New Delhi, First Edition, P-137.

12. Mitra, Jayapta, Cost & Management Accounting, Books and Allied (P) Ltd.,
Calcutta, P P-391.

13. Ibid. Krish Rangaranjan & Anil Mishra, p cit. P-191.

14. Ibid Aswath Damodaran, op cit. P-401.

15. Ibid Krish Rangaranjan & Anil Mishra, op cit. P-225.

 78

16. Kishore, M. Ravi, Financial Management, Taxmamamn 2005 PP-435.

17. Rao, K.V. Management of Working Capital in Public Enterprises, Deep & Deep
Publications, New Delhi, P-127.

18. Sharma, R.K. and Gupta, Sashik, Management Accounting Principles &
Practices, Kalyani Publishers, Ludhiana 2002, PP-22-25.

19. Ibid Krish Rangaranjan & Anil Mishra, op cit. P-146.

20. Ibid Aswath Damodaran, op cit. P-411.

21. Brearely, Richard A & Myers, C. Stewart, Principles of Corporate Finance, TATA
McGraw Hill Edition, 5th Edition, 1999, New Delhi, P-824.

22. Watson, Denzil & Head, Antony. Corporate Finance, Principles & Practice,
Pearsan Education Ptc. Ltd., New Delhi, First Edition reprint 2002, P-256.

23. Van Horne, J.C., Financial Management & Policy, Prentice Hall, 1980.

24. Scherr, F.C., op cit PP-261.

25. Kishore, M. Ravi, op cit PP-353.

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