Q.Describe the various sources from which a firm can raise its working capital.

A firm raises working capital from long-term and short-term sources, matching permanent needs to long-term sources and temporary needs to short-term sources.

A firm raises its working capital from a mix of long-term and short-term sources, guided by the matching principle: permanent working capital should be financed from long-term sources and temporary working capital from short-term sources.

Long-term sources (for permanent working capital):

1. Shares — equity or preference shares, forming part of the firm's own permanent capital.
2. Debentures and long-term loans — borrowed funds repayable after several years, suited to the stable part of working capital.
3. Retained earnings (ploughing back of profits) — profits kept in the business, a cheap internal source.

Short-term sources (for temporary working capital):

1. Trade credit — the credit period allowed by suppliers, an interest-free short-term source for the buyer.
2. Bank overdraft and cash credit — arrangements to draw beyond the account balance up to a limit, ideal for short-term fluctuations.
3. Short-term bank loans — loans for up to a year to meet seasonal needs.
4. Bills payable — accepting a bill defers payment for a fixed short period.
5. Outstanding expenses and advances from customers — unpaid expenses and advances against orders provide funds temporarily.
6. Public deposits — deposits accepted from the public for short to medium terms. …

Students often mix long-term and short-term sources together in one undifferentiated list, missing the matching principle that examiners value. Listing 'debentures' as a source of temporary working capital is …