Skip to main content

Permanent working capital

 - Sharp conversion of one year revolving working capital (RWC) loans into permanent working capital (PWC) loan

- however, can business model of those business justify those PWC loans

-[ (a) Permanent working capital: This type of working capital is known as Fixed Working Capital. Permanent working capital means the part of working capital which is permanently locked up in the current assets to carry out the business smoothly. The minimum amount of current assets which is required to conduct the business smoothly during the year is called permanent working capital.

Fixed working capital can further be divided into two categories as under: 

1. Regular Working capital: Minimum amount of working capital required to keep the primary circulation. Some amount of cash is necessary for the payment of wages, salaries etc. 

2. Reserve Margin Working capital: Additional working capital may also be required for contingencies that may arise any time. The reserve working capital is the excess of capital over the needs of the regular working capital is kept aside as reserve for contingencies, such as strike, business depression etc.](https://www.srcc.edu/sites/default/files/B.A.(Hons.)%20Eco_Sem-II_Finance(GE)_WorkingCapital_RuchikaChoudhary.pdf)


- can we say??

1. even for traders and importers- to sustain demand they must maintain certain level of WC to meet immediate demand else they will go out of business

2. but except for meeting those demands, all else WC must be circulating 

3. for manufacturer there will always be WC requirement need as process of production will take time and it must run smoothly. however, there too as per demand required WC will be fixed as long as demand is fixed. As i/p-o/p ratio will be fixed and demand for new and innovative products will show increasing trend of demand or in new geographical or other market areas


We can say that PWC then, to be measurable fact and it depends upon the business model of the borrower. Also, PWC can not be higher than RWC unless and until banks decide to provide loan to wine like product manufacturers. 


can we say if PWC > RWC then, such firms have trouble in managing liquidity and also business model is kind of failure as (hypo):

for traders leverage work to expand volume as they are in low cost strategy margin is fixed. fixed margin push to increase volume to accumulate more wealth. if they are fixing leveraged WC in fixed way then when they are going to expand volume and maximize their profit.

for manufacturers too, ratio must be kept fixed to demand (hence sales revenue) else they too will collapse by liquidity problem


risk of wrong classification:

RWC in Nepal are already of permanent nature, they lack principal movement and are source of interest movement alone, by legalizing them as PWC without assessing their business model will further postponed their recovery. 

Guideline of PWC must be prepared by sound people in every bank according to their risk profile and NRB should also have sound monitoring and provisioning guidelines for PWC. Accountants should also develop model to assess nature of assets based on their underlying nature than legal forms. 

Comments

Post a Comment

Popular posts from this blog

Sustainable development of Life

 XYZ whatever be the technicalities of a life process, the origin is, as I am convinced at this point of time, nothing but wish of Nature or who create the nature. The sole purpose of life is to consume itself. Consume is really the worst word in this context. Let me say to observe the beauty of itself by itself. Hence, we are designed in such a way with such and such purposes by the ultimate guiding truth which is ever full of knowledge of all kind. It can do anything (proof: various form of lives), it is evolved or it is ordained by truth can be a debate. Base of life is nature or life (especially human) struggle with nature to evolve itself. First one provide possibilities of re-creation of more sophisticated or more adaptable life suitable to the nature at that point of time, second is more egoist approach to life and claim nature as nothing but inert objects which are subject to enjoyment or preservation for enjoyment in future (as now discussed in the name of sustainable deve...
Post a Comment
Read more

Averaging practice in stock market and Liquidity problem in Banking

Investors in equity market (secondary) are quite familiar with averaging practice of prices. When a stock of higher cost was already purchased but the prices drop down, then purchasing stocks at lower prices (must be probable to gain some increment in those latest prices) will average the per unit cost and given increment in latest prices but lower than previous prices till make loss over previously purchased stock lesser loss making. Now, thinking the institutional capacity of banks and financial institutions and production and distribution capacity of national economy, given flood of remittance, there must be a lag in mobilization of funds through banks. Thereby keeping interest rate at lower side till national economy's capacity to produce and distribute gets increased. However, let's imagine a scenario where funds are ever demanded and loans are distributed at higher cost. Deposit rates are increased in the name of liquidity problem or liquidity premium is so high that retu...
Post a Comment
Read more

Usha

I bow down to mother Vindhyabasini/Brindabasini/Bindubasini whose grace and affection alone uplift unbearable pain of this life/ignorance. Nobody but Guru Gorakhnath is my Guru but am not that fortunate to get knowledge from himself. Neither read anything written by him.  During the discussion with few wise men it suddenly occurred or reiterate the already obtained knowledge of unreal nature of thoughts. However, this just helped to connect Usha with Savitur and once again ignite enthusiasm to write meaning of Gayatri Mantra. First line is dedicated to three kind of Jagat or realities excluding Om (which is not a wise thing to do but Om itself contains 3 Jagat and one last supreme reality so it is waste to discuss other line after explaining Om). First one is almost 16 hours a day i.e. waking state where we gather all information and act upon them. Second is dream state which is in its concrete form is 8 hours a day, unknown processing of information gathered during waking state. 3...
Post a Comment
Read more