91404 62897 working capital assessment
DESCRIPTION
Working Capital AssessmentTRANSCRIPT
State Bank of India
State Bank of India
WORKING CAPITAL
WC Assessment is outcome of two variables:
The volume of activity – Production & Sales
Required level of current assets (Inventory & Receivables) to enable the unit to carry on operations without interruptions
State Bank of India
What are Working Capital Sources?
Own funds Bank borrowings Sundry Creditors Advances from customers Deposits due in a year Other current liabilities
State Bank of India
Working Capital Limit
Generally for 12 months,
or
Seasonal industry – short duration / Peak & Non-peak level,
or
Subject to specific repayment schedule, viz EPC
Renewal necessary (within 180 days to avoid its becoming NPA)
State Bank of India
For Renewals/Enhancements:
(Put a clause in the sanction letter itself)
Send an intimation 2 months prior to renewal.
Call for:
Audited Financial Statements for 2 years (for non-corporate T.O. Rs. 60 lac & above / G P < 8% of T.O.)
Break up of various items
Projected Balance Sheet and P&L A/c
Funds Flow Statement
Renewal of Limits
State Bank of India
A note containing major developments in :
Ø Production facilities
Ø Marketing
Ø Expansion Plan
Ø Industrial Relations
Ø Prospects of the Industry
Ø Management set-up
Ø Major shareholders etc.
Assumptions & assessment of Credit Requirement
WORKING CAPITAL LIMIT
State Bank of India
WORKING CAPITAL ASSESSMENT
Working Capital Assessment Methods:
Operating Cycle Method
Traditional method
Projected Balance Sheet method
Cash Budget method
Projected Annual Turnover method (Nayak Committee)
State Bank of India
QUANTUM AND ASSESSMENT METHODSEGMENT LIMITS (Rs. Cr) SUGGESTED METHOD
SSIUpto 5 Traditional & Nayak Committee (PAT)
Above 5 Project Balance Sheet
SBF All loans Traditional & Nayak Committee (PAT)
Trade & Services
Upto 1 Traditional & Nayak Committee (PAT)
Above 1 upto 5
Projected Balance Sheet & Nayak Committee (PAT)
Above 5 Projected Balance Sheet
C & I Industrial
Below 0.25 Traditional & Nayak Committee (PAT)
Above 0.25 & over upto 5
Projected Balance Sheet & Nayak Committee (PAT)
Above 5 Projected Balance Sheet
State Bank of India
OPERATING CYCLE
Length of Operating Cycle = 60+10+20+30 = 120 days i.e. 3 Cycles in a year (365 / 120)
WORKING CAPITAL ASSESSMENT
OPERATINGCYCLE
RawMaterial
Stock inProcess
FinishedGoods
BillsReceivable
Cash
60 Days
10 Days
20 Days
30 Days
State Bank of India
OPERATING CYCLE: PERMISSIBLE BANK FINANCE
WORKING CAPITAL ASSESSMENT
Operating cycle is 120 day (4 months) or 3 cycles in a year
Sales (P.A.) Rs. 200000/-Operating expenses Rs.180000/-What is Working Capital requirement? Operating Expenses 180000 --------------------------- = ---------- = Rs 60000/- No of cycles per annum 3
Thus, Working Capital requirement is influenced by:(a)Level of operating expenses or Level of Operations.(b)Length of operating cycle.Reduction in either will bring down WC requirement.Reduction also indicates improved efficiency in WC Mgt.
State Bank of India
Measuring Period for W C Components
1. RM Holding Period: (Stock of RM * 365 / Annual Consumption of RM)
2. SIP Holding Period : (SIP * 365 / Cost of Production)
3. Fin. Goods Holding Period : (FG Level * 365 / Cost of Sales)
4. Receivables Holding Period : (Bills Receivable * 365 /Annual Gross Sales)
5. Advances paid to Suppliers Period : (Advances paid * 365 / Annual Purchases)
6. Trade Creditors Holding Period : (TC Level * 365 / Annual Purchases)
7. Adv. Recd. against Sales Period : (Advance Received * 365 / Annual Gross Sales)
Stage wise monitoring not possible. Rely on Averages
State Bank of India
Traditional Method
Item Stocking period
WC required
Margin(%)
Amt Permissible Limit
Raw Material 1 m 80 20 16 64
Work in process 2 w 45 33 15 30
Finished Goods 2 w 45 20 09 36
Receivable 1 m 90 (100)40 40 60
Expenses 1 m 10 100 10 -
Total 270 190Less: Advance Payment 15
Credit on purchase 10
Working Capital Required
245
Unit: ABC Ltd (Rs. In lacs)Monthly sales = 100 Cost of Production P.M. = 90Cost of Raw Material per month = 80
Liquid surplus in BS at the end of last year = 40Limit from Bank = 190
Net Deficit = 245 – 40 = 205
State Bank of India
Projected Balance Sheet Method Proper examination of performance
• Profitability
• Financial Position
• Financial Management
Scrutiny & Validation of Projections
• Income & Expenses
• Changes in Financial Position
Acceptability of Liquidity, Overall gearing, efficiency of operations
State Bank of India
Projected Balance Sheet Method
Obtain Data on CMA (separate projections for Peak / Non-peak)
Validate Current Liabilities ?
Validate Current Assets ?
State Bank of India
Projected Balance Sheet Method
Validation of Current Liabilities1. Short term borrowings (including bills purchased)
2. Unsecured loans
3. Public deposits maturing within one year
4. Sundry Creditors (trade)
5. Interest / other charges accrued & due
6. Advance / progress payment from customers
7. Deposit from dealers (subject to conditions)
8. Install. of term loans / debentures / redeemable preference shares (falling due in next 12 months)
9. Statutory liabilities
10. Misc. C.L. - Dividends & other payments (falling due in next 12 months)
State Bank of India
Projected Balance Sheet Method
Validation of Current Assets1. Cash & Bank Balance
2. Investments :
a) Govt. & other Trustee Securities
b) Fixed Deposits with Banks
3. Receivables
4. Instalments of deferred receivables due within one year
5. Raw Material / components used in manufacturing
6. SIP & Finished Goods
7. Advance payment of Tax
8. Pre - paid expenses
9. Advance for purchase of raw materials etc.
10.Receivable from sale of fixed assets ( in 12months)
State Bank of India
Levels of Inventory, Receivables & Sundry Creditors
Trends
Inter-firm comparison
Industry Levels
Borrowers specific strengths & weaknesses
Suggested levels of inventory & receivables
Production Policy – Constant/seasonal
State Bank of India
Validation of Raw Material Holding
Average consumption / holding
Source – local / outside / abroad
Time taken
Minimum order quantity
Cost of holding
Criticality
Transport Cost
Credit available
Seasonality
State Bank of India
Validation of SIP Holding
Processing time
Processing technology
No. of shifts
State Bank of India
Validation of Finished Goods Holding
Firm order or anticipated order
Minimum despatch quantity
Transport availability / cost
Seasonality
Marketing arrangement
State Bank of India
Sundry Debtors
Trade practices
Market conditions
Bulk sales - benefits
Price advantage
Seasonality (vis. rain coats, woollen garments)
State Bank of India
PBS (ASSESSED BANK FINANCE) METHODPrevious
YearCurrent
YearNext Year
A Total CA
B Other CL
C Working Capital Gap (A - B)
D Net Working Capital (Actual / Projected)
E Assessed Ban Finance (ABF) (C - D)
NWC / TCA (%)
Bank Finance / TCA (%)
S. Creditor / TCA (%)
Other CL / TCA (%)
Inventory to Net Sales (days)
Receivable to Gross Sales (days)
S. Creditor / Purchases (days)
State Bank of India
Evaluation of Liquidity
Benchmark current ratio is 1.33Depends upon:
Size of operationOverall financial positionTerm Loan installmentsExport oriented unitsExpansion of existing capacitySetting up new unitReduction in level of deposits accepted, etc.
State Bank of India
Bills Purchased Under L/C
L/C From Approved Bank
(Outside The ABF)
L/C From Not Approved Bank
(Within The ABF)
State Bank of India
Cash Budget Method
Applicable to seasonal industry
(such as tea, sugar)
Specific industry
(such as Information Technology and software)
Based on Peak Deficit projected as per cash flow statement
State Bank of IndiaMonth 1 2 3 4 5 6 7 8 9 10 11 12
Sales 540 720 360 360 100 180 300 360 360 240 240 450
Receipts 351 531 657 414 334 147 180 288 351 348 258 261
Cash Sales 54 72 36 36 10 18 30 36 36 24 24 45
Collections 297 459 621 378 324 129 150 252 315 324 234 216
Payments 383 536 633 356 317 172 221 314 381 338 254 311
To Creditors 252 378 504 252 252 70 126 210 252 252 168 168
Wages 81 108 54 54 15 27 45 54 54 36 36 68
Others 50 50 75 50 50 75 50 50 75 50 50 75
Surplus/Deficit -32 -5 24 58 17 -25 -41 -26 -30 10 4 -50
BF Cash 10 -22 -27 -3 55 72 47 6 -20 -50 -40 -36
Cum. Cash -22 -27 -3 55 72 47 6 -20 -50 -40 -36 -86
Cash in Hand 10 10 10 10 10 10 10 10 10 10 10 10
Cum.Surplus/Deficit
-32 -37 -13 45 62 37 -4 -30 -60 -50 -46 -96
State Bank of India
Projected Turnover Method (Nayak Committee)
• Up to FBWC Limit of Rs. 5 crores - SME
• WC Requirement = 25% of realistic Projected Annual Turnover (min. 5% of turnover to be brought by borrowers as their contribution)
State Bank of India
TURNOVER METHOD
A. Annual Turnover as projected by Borrower
B. Turnover as accepted by Bank
C. Working Capital Requirement (25% of B)
D. Minimum margin required (5% of B)
E. Actual Margin available (CA - CL)
F. Item C - item D
G. Item C - item E
H. Min. WC Finance - F or G, whichever is less
COMPUTATION
State Bank of India
Projected Annual Turnover Method
A. Annual Turnover as projected by Borrower 1200
B. Turnover as accepted by Bank 1200
C. Working Capital Requirement (25% of B) 300
D. Minimum margin required (5% of B) 60
E. Actual Margin available (CA - CL) 20
F. Item C - item D 240
G. Item C - item E 280
H. Min. WC Finance - F or G, whichever is less 240
COMPUTATION
State Bank of India
LC Assessment
FLC ILC
1 Annual purchase/import
2 Out of (1) on credit basis
3 Out of (2) on usance LC basis
4 Average of (3) per month
5 Lead time (no. of months)
6 Usance period (no. of months)
7 Usance LC requirement (5+6) X (4)
State Bank of India
Thank You
State Bank of India
TRADITIONAL METHOD
Item Stocking /Payment
period
WC required
Margin(%)
Amt Permissible Limit
Raw Material 1 m 25
Work in process 2 w 25
Finished Goods 2 w 25
Receivable 1 m 33
Expenses 1 m 100
Total
Less: Advance Payment
Credit on purchase
Working Capital Required
Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000’s)Anticipated monthly sales = 200 Cost of Production per month =190Cost of Raw Material per month = 150 Advance Payments from Customers 30
Liquid surplus in BS at the end of last year = 50Pl work out Cash Credit Limit from Bank
Net Deficit
State Bank of India
TRADITIONAL METHOD
Item Stocking /Payment
period
WC required
Margin(%)
Amt Permissible Limit
Raw Material 1 m 150 25 37 113
Work in process 2 w 95 25 24 71
Finished Goods 2 w 95 25 24 71
Receivable 1 m 190 33 66 134
Expenses 1 m 40 100 40 00
Total 570 389
Less: Advance Payment 30
Credit on purchase 80
Working Capital Required 460
Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000’s)Anticipated monthly sales = 200 Cost of Production per month = 190Cost of Raw Material per month = 150 Advance Payments from Customers 30
Liquid surplus in BS at the end of last year = 50Cash Credit Limit from Bank = 390
Net Deficit 460 - 50 = 410