Tandon Method 1 Audited Audited Provisional Projected

1Total current assets 51639 47578 46340 49700
2a.Bank borrowings 7680 6700 13000 13000
2b. OCL 34054 39300 21870 24270
2Total Current liabilities 41734 46000 34870 37270
3Net Working capital gap 17585 8278 24470 25430
4Minimum stipulated NWC (Net 4396.25 2069.5 6117.5 6357.5
Working Capital Gap )* 25%

5NWC 9905 1578 11470 12430

6(3-4) 13188.75 6208.5 18352.5 19072.5
7(3-5) 7680 6700 13000 13000
8Maximum Permissble Bank Finance 7680 6208.5 13000 13000
(lower of 6 and 7 )

9Actual Borrowing 7680 6700 13000 13000

10Excess borrowing 0 491.5 0 0
11Current ratio 1.237336 1.034304 1.328936048 1.333512
 TANDON COMMITTEE (2nd method) 2017-18 2018-19 2019-20 2020-21
    Audited Audited Provisional Projected
1Total current assets 51639 47578 46340 49700
2a.Bank borrowings 7680 6700 13000 13000
2b. OCL 34054 39300 21870 24270
2Total Current liabilities 41734 46000 34870 37270
3Net Working capital gap 17585 8278 24470 25430
4Minimum stipulated NWC (Net Working 12909.75 11894.5 11585 12425
Capital Gap )* 25%
5NWC 9905 1578 11470 12430
6(3-4) 4675.25 -3616.5 12885 13005
7(3-5) 7680 6700 13000 13000
8Maximum Permissble Bank Finance 4675.25 -3616.5 12885 13000
(lower of 6 and 7 )
9Actual Borrowing 7680 6700 13000 13000
10Excess borrowing 3004.75 10316.5 115 0
11Current ratio 1.237336 1.034304 1.328936048 1.333512
• In method 1, the minimum current ratio expected is 1.25 while in
method 2 it is 1.33.
• If current ratio is 1.33 and more, then the permissible finance is the
same under both methods.
• If current ratio is below 1.25 and 1.33 under the methods
respectively, the calculation will indicate an excess borrowing
TURN OVER METHOD - NAYAK COMMITTEE METHOD)

• A committee headed by P R Nayak, the then DG of RBI came out with these
recommendations :
• Working Capital requirement at 25% of the gross sales (not net sales) turnover
• Out of 25% of working capital requirement, 5% of total turnover will be brought
by the borrower as Margin and the remaining 20% will be Bank borrowing.
• If the borrower is having a Margin of more than 5% of projected Turnover in the
system, Bank borrowings can be correspondingly reduced as it is a need based
finance.
• If the borrower is having a Margin of less than 5%, he may be sanctioned a limit
@ 20% of the projected turnover but the DP should have to be monitored
properly.
• Suppose projected and agreed sales turn over of a unit is Rs.100.00
lacs. The working capital requirement as per Turn Over method is
Rs.25.00 lacs. The borrower will bring margin of Rs. 5.00 lacs . So the
bank borrowing will be 20 lakhs.
• Now suppose the borrower shows a projected margin of Rs. 7.00
lakhs, then the bank borrowing will be Rs. 18 lakhs. (25-7)
• Again if the borrower shows a projected margin of Rs. 4 lakhs, bank
borrowing (sanctioned) will be Rs. 20 lakhs. However the drawing
power will need to be regulated
• A. Projected sales/turnover = 200 lakhs
• B. Minimum WC requirement (25% of the T/O ) = 50
• C. Minimum Margin of 5% of T/O or 20% of WC requirement = 10
• D. Eligible finance (B)-(C) = 40
• E- Margin available in the system NWC = 8 (say)
– (NWC as per last audited balance sheet)
• F Eligible Bank Finance(B-E)or D whichever is less = 40
• G- Eligible Bank Finance as per actual availability of Margin ( E x 4) = 32
• H Permissible Bank Finance (F or G whichever is less) = 32
• I Limit recommended (Limit sought or H whichever is less)
• The projected Turnover should be acceptable to the Bank.
• Reasons for accepting the turnover projected by the borrower.

 Past trend – Industry trend

 Quarterly/Half yearly financial statements
 Monthly VAT returns
 Credit turnover in the account
 Fresh orders
 Achievement against previous years projections
Expenditure Method
• This method is used for assessing working capital requirement of
Hotels, Restaurants, Educational Institutions, Hospitals, Travel agents
etc.
• 60 to 90 day’s expenses like salary, electricity, consumables,
telephone, maintenance etc. is projected.
• 75% of the projected expenses is given as a working capital.
• 25% to be brought as margin by the borrower.
Cash Budget Method
• Working capital limits are assessed on the basis of projected cash gap or cash deficit on the
basis of monthly/ quarterly/ half yearly and yearly projections of cash receipts and payments
• This method is used for assessing working capital requirement of Large Contractors and
Infrastructure Projects, IT sector etc.
• Monthly projections on each items in the assets & liabilities are made.
 Sources increased = Inflow of Funds
 Sources decreased = Outflow of Funds
 Uses Increased = Outflow of Funds
 Uses Decreased = Inflow of Funds
• Difference between INFLOW & OUTFLOW will be either surplus or deficit. Deficit needs to be
financed.
• 25% of Deficit to be the margin & 75% will be the Bank finance.
• This method is a major customer – friendly method and well suited
for borrowers who are dealing with seasonal products and
construction and other order based activities.
• Banks however stand the risk of heavy dependency on projected cash
flows which cannot be accurately verified and lack transparency.
Banks have to ensure end use only by verifying the cash flows as there
is no need for stock statements. Instead borrowers have to submit
actual receipts and payment account.