Working Capital Assessment ~SSETY~GI

l . Operating Cycle Method

2. Drawing Power Method
3. Turnover od
4. MPBF Method (Maximum Permissible Bank Finance)
5. Cash Budget Method
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 Operating C cle Method h-SSETY~GI

C-A· C..L-
~w p Operatin C cle /
SVf ~'<. __!~~::::_ = RM+ WIP+ FG+ o !b~"ars- Creditors

Jci:\r. ,_
IJJJ>V'
.--....... RA•-' M 3o_
......
:-o_ ~ 3D6-°t'cA. ~a. +).ocl t.YJ1- ~
.:::- { 0

Bills f lf.,,,,J.1.iC·l:'i1IV1 No. of Operating Cycles= 36S"J. ::::.b

/Ze.ce."1.\fClb\e..s.\ f'tocess p.Q. . {oJ.
])ebt IDJ. Annual Turnover= Rs. 1...§Q_L
jtl~ ~ ! 0
~ Wo'ik. ~Vl ftr-oriess Annual Operatin Ex enses = 120 L
£A.le..s . { J. t · DVI -===-~
- F1,V\i.s~d~ft,;f0 cu, ... W.C . Reqmt. = Annual Operating Expenses
1 1"oc.ess
Gi o-o~ s No. of Operating Cycles
1",:,o.
_ \!lo L
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Drawing Power Method ~SSETY~GI

Sanctioned Limit
• Total Workin Ca ital Limit allotted to a customer
by Bank rH I ~~,)t,jv I Sec..u,u\.-;Cb
• Based on Collateral submitted by borrower and
credit a raisal by Bank Cash C red it
• Can be reviewed periodically, say annually
Drawing Power
111111 A ccount

• Amount that a customer can withdraw every month

quarter from Cash Credit Account based on Inventory
oc s, Accounts Receivables & Supplier Credit
- . ..'lS-·1:--40· 1.
• Drawing Power fC.-. ,..-)~·(. ~} \
,----,--- ~"" -1- \J \ p-+ . I
= (Stock less Creditors - Margin) + (Book Debts - Margin)
• Drawing Power can change eve month - depends on
value of inventory stocks, debtors and creditors
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Drawing Power Method h-SSETY~GI

Drawing Pow r = (Stock less Creditors - Margin) + (Book Debts - Margin)

• Stocks, Creditors, B ebts - Closing position

,......,-o f previous month
• Book Debts < 90 do s old are only considered
Cash Credit
Example - Month 1 Month 2
Stocks (~ +WIP+FG = Rs. 35 lakhs Rs. 55 lakhs 111111 A ccount

Creditors = Rs. 10 lakhs Rs. 10 lakhs

Book Debts< 90 d = Rs. 25 lakhs Rs. }5 lakhs
Margin on Stocks = 25%
Margin on Book Debts = 40%
D.P. (Month 2 = (3~-lo )(1-(),l.<;)
+ .1S(1~().'1')
-::o-- l. c; '1- b -1 ) t- l.<;- '1-,0-l
~ l'l, -7S" ,-1S-.:- 3 °!> .7 .rL SUBSCRIBE
Turnover Method - Nayak Committee Norms ~SSETY1@GI

Background Checks By Banks

Banks to satisfy themselves on the projected
turnover, by
Assessing Sales of last 2 years & growth rates
111111
Projections to be within reasonable limits say~
growth r
Deviations may be allowed if supported by firm
mde~ --

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Turnover Method - Nayak Committee Norms &SSETY~GI

Working Capital Requirements lt>pmii1 ~ ~

For ~ Units - upto Rs. 5 Cr. )> 5 .£... I YIP&!> {- ../ ____
For Others - upto Rs. 1 Cr. )> I h\. J~~l"I"\ 111111
W,.tJT f 1,11P
Assumption - 4 Operatin ~ es p.a. J~ ~
W.C . Rqmt. = 25% of Projected Annual Turn3vef'i
Min. Bank Limit - 20% of Sales, Margin - 5% of Sales
-=- ----====-- -

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 Maximum Permissible Bank Finance (MPBF) ~SSETY~GI

Current Assets {C.A.) - jvw. (tMtLJ\P~f'i)-r P..R.

Current Liabilities {C.L.) - ..fuA.Ato-v:> +- (i, · ~ ·
Other Current Liabilities {OCL) = CL - Bank Borrowin s 111111
Working Capital Gap {WCG) = CA - OCL
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MPBF - Method I (ti b~) MPBF - Method 11 (St'1i'c;PJJ
'-JL.t..-MPBF = WCG - Margin i MPBF = WCG - Margin i
Margin = 25% of WCG
MPBF = 75% WCG

Margin Money to be arranged from Long Term Funds {Equity or Long Term Debt)
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Maximum Permissible Bank Finance (MPBF) ~SSETY~GI

A) CA ( st«.k +-
BJ CL
~ ..{)
-
= Rs . 500 L
= Rs. 150 L
C) Bank Borrowings = Rs. 50 L 111111
DJ OCL (B-C) = Rs. 100 L
E) WCG (A-DJ = Rs. 400 {c,A- oc.,0
=--
MPBF - Method I [Jib~) MPBF-Method II (€.f~e,,.,,t")
Margin (I)= 25% WCG ::. t> 2,s;')(. '1bo ~ looL Margin (II) = 25% CA ~ o ,l/;'/< S-oo -==- Lt S- L
MPBF(l) ~Lioo-Jor::i:::. 3,ooL- {JtJc....L) MPBF (II) ::::- -4 OCl ~.l.S == '- 7 ~ L IJLL)

Current Ratio (I) Current Ratio (II)

CR= CA : :,. ~ : :.- ~::. I-'-~ CR= CA -::... roo
, ~00 ----- -
OCL + MPBF (I) ' 0<> + ;:,\IC OCL + MPBF (II) ( ODt 1 ?c:;
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Cash Budget Method ~SSETY~ GI

• Applicable for Cyclical (Seasonal) Industries

~ ~.J.UJ..._y come in one season, Cash Realization
may be sprea ut
111111
• Eg. Tea Sugar, Construct" n, Film Software,
Contractors, Exporters, Order Based Constructio n
Co mpany
• Unlike other methods, W.C. Limit is calculated
based on projected Cash Flows and not on
projected Current Asse s t Liabilities
• Company to submit Past 1 Year's Actual and
Future l Year projected Cash Flow Statement
• Working Capital Requirements during Cash Deficit
periods
• Bank assigns Working Capital Requirement based
on peak Cash Deficit
Cash Budget Method
All Figures in Rs. Lokhs
II Afilr Ma~ Jun Jul Aur-1 Ser.i
~O~ enint'il Cash Balance r:I 30 50 50 50 50 50
:cash Recei]'!Jts ~ 200 200 220 220 230 240
~Less: ParJments
~Less: Closin~ Cash Balancec
- 180
50
180
50
280
5fil
250
50
200
50
210
50
~ura· lus / Deficit 0 20 ml -60 tij -30 30 30
-=--- -
Working Capital Limit = Peak Deficit (Jun) =. Rs . 60 lakhs