The following points highlight the top ten sources of working capital finance. The sources are: 1. Intercorporate Loans and Deposits 2. Commercial Paper (CP) 3. Funds Generated from Operations 4. Retained Profit 5. Depreciation Provision 6. Amortisation Provisions 7. Deferred Tax Payments 8. Accrued Expenses 9. Deposits and Advances 10. Public Deposits.
Source # 1. Intercorporate Loans and Deposits:
In present corporate world, it is a common practice that the company with surplus cash will lend other companies for short period normally ranging from 60 days to 180 days. The rate of interest will be higher than the bank rate of interest and depending on the financial soundness of the borrower company. This source of finance reduce intermediation of banks in financing.
Source # 2. Commercial Paper (CP):
CP is a debt instrument for short-term borrowing, that enables highly-rated corporate borrowers to diversify their sources of short-term borrowings, and provides an additional financial instrument to investors with a freely negotiable interest rate. The maturity period ranges from three months to less than 1 year.
Since it is a short-term debt, the issuing company is required to meet dealers’ fees, rating agency fees and any other relevant charges. Commercial paper is short-term unsecured promissory note issued by corporation with high credit ratings.
Source # 3. Funds Generated from Operations:
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Funds generated from operations, during an accounting period, increase working capital by an equivalent amount. The two main components of funds generated from operations are retained profit and depreciation. Working capital will increase by the extent of funds generated from operations.
Source # 4. Retained Profit:
Profit is the accretion of fund which is available for finance internally, to the extent it is retained in the organization. Retained profits are an important source of working capital finance.
Source # 5. Depreciation Provision:
Since there is no cash outflow to the extent of depreciation provided in the accounting, it is used for financing the internal operations of a firm. The amount deducted towards depreciation on fixed assets is not immediately used in acquisition of fixed assets and such amount is retained in business for same time. This is used as a temporary source of working capital so long as the capital expenditure is postponed.
Source # 6. Amortisation Provisions:
Any provisions made for meeting the future payments or expenses such as provision for dividend, provision for taxation, provision for gratuity etc. provide a source of finance so long as they are kept in the business.
Source # 7. Deferred Tax Payments:
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Another source of short-term funds similar in character to trade credit is the credit supplied by the tax authorities. This is created by the interval that elapses between the earning of the profits by the company and the payment of the taxes due on them.
Deferred payment of taxes is also used as a temporary source of working capital so long as the amount is deposited with the tax authorities. The taxes deducted at sources, collection of sales tax and excise duty, retirement benefits deducted from salaries of staff etc. also retained in business for some time and used as a source of working capital.
Source # 8. Accrued Expenses:
Another source of spontaneous short-term financing is the accrued expenses that arise from the normal conduct of business. An accrued expense is an expense that has been incurred, but has not yet been paid.
For most firms, one of the largest accrued expenses is likely to be employees’ accrued wages. For large firms, the accrued wages held by the firm constitute an important source of financing. Usually, accrued expenses are not subject to much managerial manipulation.
Source # 9. Deposits and Advances:
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The deposits collected from dealers and advances received from customers will also constitute a source of finance.
Source # 10. Public Deposits:
Deposits from the public is one of the important source of finance particularly for well established big companies with huge capital base. The period of public deposits is restricted to a maximum 5 years at a time and hence, this source can provide finance only for short-term to medium-term, which could be more useful for meeting working capital needs of the company. It is advisable to use the amounts of public deposits for acquiring assets of long-term nature unless its pay back is very short.