Q.1 What is Working capital? Explain various sourced of financing working capital.

Working Capital (WC), also known as Net Working Capital (NWC), is the difference between a
company’s current assets and current liabilities. It is a good indicator of a business’s liquidity
and short-term financial health and its ability to utilise its assets efficiently.
A company has various sources of working capital. Depending upon its condition and
requirements, a company may use any of these sources of working capital. These sources may
be spontaneous, short-term, or long-term.

• Spontaneous Sources: The sources of capital created during normal business activity
are called spontaneous sources of working capital. The amount and credit terms vary
from industry to industry and depend on the business relationship between the buyer
and seller. The main characteristic of spontaneous sources is ‘zero-effort’ and
‘negligible cost’ compared to traditional financing methods. The primary sources of
spontaneous working capital are trade credit and outstanding expenses.
• Short-term Sources: The sources of capital available to a business for less than one
year are called short-term sources of working capital.
• Long-term Sources: The sources of capital available to a business for a longer period,
usually more than one year, are called long-term sources of working capital.
A. Short-term sources of working capital
Short-term sources of capital may further be divided into two categories – Internal Sources
and External Sources.
The short-term internal sources of working capital include provisions for tax and dividends.
These are essentially current liabilities that cannot be delayed beyond a point. All companies
make separate provisions for making these payments. These funds are available with the
company until these payments are made. Hence, these are called the internal sources of
working capital. However, this value is relatively small and thus not that significant.
On the other hand, the short-term external sources of working capital include capital from
external agencies like banks, NBFCs, or other financial entities. Some of the primary sources
of short-term external sources of working capital are listed below:

• Loans from Commercial Banks: Businesses, mostly MSMEs, can get loans from
commercial banks with or without offering collateral security. There is no legal
formality involved except creating a mortgage on the assets. Repayment can be made
in parts or lump sum at the time of loan maturity. At times, banks may offer these
loans on the personal guarantee of the directors of a country. They get these loans at
concessional rates; hence it is a cheaper source of financing for them. However, the
flip side is that getting this loan is a time-consuming process.
• Public Deposits: Many companies find it easy and convenient to raise funds for
meeting their short-term requirements from public deposits. In this process, the
companies invite their employees, shareholders, and the general public to deposit
their savings with the company. As per the Companies Act 1956, companies can
advertise their requirements and raise money from the general public against issuing
shares or debentures. The companies offer higher interest rates than bank deposits to
attract the general public. The biggest of this source of financing is that it is simple and
cheaper. However, its drawback is that it may not be available during the depression
and financial stringency.
 • Trade Credit: Companies generally source raw materials and other items from
suppliers on credit. The amount payable to these suppliers is also treated as a source
of working capital. Usually, the suppliers grant their buyers a credit period of 3 to 6
months. Thus, they provide, in a way, short-term finance to the purchasing company.
The availability of trade credit depends on various factors like the buyer’s reputation,
financial position, business volume, and degree of competition, among others.
However, when a business avails trade credit, it stands to lose the benefit of cash
discount, which it would earn if they make the payment within 7 to 10 days of making
the purchase. This loss of cash discount is treated as an implicit cost of trade credit.
• Bill Discounting: Just as business buys goods on credit, they offer credit to their
buyers. The credit period may vary from 30 days to 90 days and sometimes extends,
even up to 180 days. During this period, the company funds get blocked, which is not
good. Instead of waiting that long, sellers prefer to discount these bills with a bank or
NBFC. The financial entity charges some amount as commission, called a ‘discount’,
and makes the balance payment to the sellers. This discount compensates them for
the time gap between disbursing and collecting the money on the maturity of the bill.
This ‘discount’ charged by the bank is treated as the cost of raising funds through this
method. Businesses widely use this method for raising short-term capital.
• Bank Overdraft: Some banks offer their esteemed customers and current account
holders a facility to withdraw a certain amount of money over and above the funds
held by them in their current account with the bank. The bank charges interest on the
amount overdrawn and the period it is withdrawn. The overdraft facility is also
granted against securities. The bank sets this limit and is subject to revision anytime,
depending upon the customer’s creditworthiness.
• Advances from Customers: One effortless way to raise funds to meet the short-term
requirement is to ask customers for some payment in advance. This advance confirms
the order and gives much-needed cash to the business. No interest is payable to the
customer for this advance. Even if any business pays interest, it is very nominal. Hence,
this is one of the cheapest sources of raising funds to meet companies’ short-term
working capital requirements. However, this is possible only when the customers do
not choose the terms of the sellers.

B. Short-term sources of working capital

When the companies require funds for more than one year, it makes sense to go for long-
term sources, as they are generally cheaper than short-term sources.
Like short-term sources, long-term sources may also be classified as internal and external
sources. Retained profits and accumulated depreciation are internal sources wholly earned
and owned by the company itself. These funds are available to a company without any direct
cost.
The external sources of long-term sources of working capital are listed below:

• Share Capital: The Company may raise funds by offering the prospective shareholders
a stake in their business. These shares may be held by the general public, banks,
financial institutions, or even other companies. The response depends on several
factors, including the company’s reputation, perceived profit potential, and general
 economic condition. In return, the company offers dividends to their shareholders,
which along with the floating cost, is treated as the cost of sourcing. However, the
company is not legally bound to pay this dividend. Also, no rule prescribes how much
dividend is to be given. All this makes this a very cheap source of working capital. But,
in reality, most companies do not use this for meeting their working capital needs.
• Long-term Loans: Also called Working Capital Loans, these long-term loans may be
temporary or long-term. The long-term here is generally 84 months (7 years) or more.
This loan is not taken for buying long-term assets or investments and is used to provide
working capital to meet a company’s short-term operational needs. Experts advise
using long-term sources for permanent needs and short-term sources for temporary
working capital needs.
• Debentures: Like shares, debentures also include generating money from the general
public, financial institutions, and other companies. However, unlike shares, in the case
of debentures, the company has to declare the interest they will pay to their lenders
openly. The company is legally bound to pay the agreed interest. So, here, if the funds
are unused or even if the company runs into losses, they have to pay the lenders.

Q.2 What is Intellectual Property?

Intellectual property (IP) refers to creations of the mind, such as inventions; literary and
artistic works; designs; and symbols, names and images used in commerce. IP is protected in
law by, for example, patents, copyright and trademarks, which enable people to earn
recognition or financial benefit from what they invent or create. By striking the right balance
between the interests of innovators and the wider public interest, the IP system aims to foster
an environment in which creativity and innovation can flourish.
➢ Patent
A patent is an exclusive right granted for an invention. Generally speaking, a patent provides
the patent owner with the right to decide how - or whether - the invention can be used by
others. In exchange for this right, the patent owner makes technical information about the
invention publicly available in the published patent document.
➢ Copyright
Copyright is a legal term used to describe the rights that creators have over their literary and
artistic works. Works covered by copyright range from books, music, paintings, sculpture and
films, to computer programs, databases, advertisements, maps and technical drawings.
➢ Trademark
A trademark is a sign capable of distinguishing the goods or services of one enterprise from
those of other enterprises. Trademarks date back to ancient times when artisans used to put
their signature or "mark" on their products.