Working Capital Management Question: Download Questions PDF
Tell me what were the main issues studied by Tandon committee to exercise control over working capital?
Answer:
The observation and recommendations made by Tandon committee were:
1) Norms : The committee suggested 15 industries excluding engineering industries. These norms were suggested in following forms:
a. For Raw materials: Consumption in months
b. For Work in Progress: Cost of production in months
c. For Finished Goods: Cost of Sales in months
d. For Receivables: Sales in months
2) Methods of Borrowings : It introduced the concept of working capital gap which the excess of current assets over current liabilities other than bank borrowing. They also suggested three progressive methods to decide the maximum limits according to which banks should provide the finance.
3) Style of Lending : Is suggested that the cash credit limit should be bifurcated into two components i.e. Minimum level of borrowing required throughout the year should be financed by way of a term loan and the demand cash credit to take care for fluctuating requirements.
4) Credit Information Systems : The committee recommended the submission of a quarterly reporting system based on actual ass well as estimations, so that the requirements of working capital may be estimated on the basis of production needs.
5) Follow up, Supervision and Control : The committee suggested that there should be a proper system of supervision and control.
6) Norms for Capital Structure: The committee did not suggest any right norm for debt equity ratio, the committee opined that if the trend of debt equity ratio is worse than the medians, the banker should persuade the borrowers to strengthen the equity base as early as possible.
1) Norms : The committee suggested 15 industries excluding engineering industries. These norms were suggested in following forms:
a. For Raw materials: Consumption in months
b. For Work in Progress: Cost of production in months
c. For Finished Goods: Cost of Sales in months
d. For Receivables: Sales in months
2) Methods of Borrowings : It introduced the concept of working capital gap which the excess of current assets over current liabilities other than bank borrowing. They also suggested three progressive methods to decide the maximum limits according to which banks should provide the finance.
3) Style of Lending : Is suggested that the cash credit limit should be bifurcated into two components i.e. Minimum level of borrowing required throughout the year should be financed by way of a term loan and the demand cash credit to take care for fluctuating requirements.
4) Credit Information Systems : The committee recommended the submission of a quarterly reporting system based on actual ass well as estimations, so that the requirements of working capital may be estimated on the basis of production needs.
5) Follow up, Supervision and Control : The committee suggested that there should be a proper system of supervision and control.
6) Norms for Capital Structure: The committee did not suggest any right norm for debt equity ratio, the committee opined that if the trend of debt equity ratio is worse than the medians, the banker should persuade the borrowers to strengthen the equity base as early as possible.
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