Capital Requirements of a Project

 Capital Requirements of a Project:

It is essential to estimate the working capital requirements of a project to ensure smooth project implementation. In India Working capital finance for projects is provided according to the lending norms of the tandon committee. 

 

The working capital requirements of a project consists of –

• Raw materials and Components
• Stock of Work in Progress
• Stock of Finished Goods
• Debtors
• Operating Expenses

 

Sources of Working Capital Finance for a project  –

·         Working capital Advances provided by commercial Banks

·         Trade Credit

·         Accruals and Provisions

·         Long term sources of Finance

 

Limitations of Obtaining Working Capital Finance –

• The maximum permitted bank finance is computed on the basis of norms laid down by the Tandon Committee in its Lending Norms.
• A firm has to also provide certain margin money against its current assets in order to obtain working capital finance.
• Maximum permissible bank finance can be computed by the following –

 

Current assets (75%) as per norms of Tendon committee              –                                     Non-Bank current liabilities i.e. Trade Creditors and provisions.

*25% of the current assets must be supported by long term finance

• The margin requirements vary with the type of current asset –

o   The margin money for Raw Material – 10% – 25% of cost of raw materials

o   The margin money for Work In Progress – 20% – 40%

o   The margin money for Finished Goods – 30% – 50%

o   The margin money for Debtors – 30% – 50%