Labour

In work in progress = 2 months

(i.e. average time period between employment of labourers in the work and receipt of payment from owner of the project)

Equipment

In work in progress = 2 months

(i.e. average time period between use of equipment in the work and receipt of payment from owner of the project)

Credit from renting company = 1 month

Overhead

In work in progress = 2 months

(i.e. average time period between commencement of work and receipt of payment from owner of the project)

The working capital requirement of the construction company in the project till the receipt of payment from the owner of the project is given by;

Working capital financing

Financing of working capital is an important aspect of working capital management. The different sources of financing of working capital are short-term sources (bank financing such as loan facility, overdraft facility etc., trade credit, short-term sources other than banks etc.) and long-term sources (retained earnings, shares, debentures, long-term loans from banks and other sources, government development grants etc.). One of the important aspects in working capital financing lies in determining the suitable mix of long-term and short-term finances as this is likely to affect the balance between liquidity and profitability of the company and the associated cost and risk of financing. The long-term finances are more costly as compared to short-term finances.

There are three basic approaches of financing working capital such as matching or hedging approach, conservative approach and aggressive approach. In matching or hedging approach, the permanent part of working capital requirement is financed by funds from long-term sources whereas the variable component is financed through short-term sources. Thus in this approach, the source of finance matches with the nature of the current assets. In conservative approach, the permanent part of working capital requirement and part of variable working capital are financed from long-term sources and short-term sources are used only to meet the emergency requirements. As majority of working capital financing is from long-term sources, this approach makes the financing more costly, less risky and leading to more liquidity and less profitability. In aggressive approach, the variable part of working capital requirement and even part of permanent working capital requirement are financed from short-term sources. As major sources of finances are short-term, this approach makes the financing less costly, more risky and results in low liquidity and high profitability.

It may be noted that, for further reading of various topics presented in lectures of different modules, the texts mentioned in the list of references for this course can be referred.