working capital assessment

WORKING CAPITAL

ASSESSMENT- Umang Soni

- WRO0276669

WHAT IS WORKING CAPITAL ?

Funds required to fulfill short term obligations & smoothly conduct

routine business operations.

Gross WC Net WC

Assets which are normally converted into cash during the operating cycle of the entity. Cash & Bank balances Inventory Receivables Advances to suppliers/others Marketable Securities Other Current assets

WHAT ARE CURRENT ASSETS ?

Raw Materials (RM/RM Consumption)Add: Work-In-Process (WIP/COP)Add: Finished Goods (FG/COS)Add: Receivables (Debtors/Credit sales)Less: Creditors (Creditors/Purchases)Operating Cycle

It begins with acquisition of raw materials and ends with collection of receivables.

OPERATING CYCLE

Nature of Business & Operations

Production Policy

Market conditions

Conditions of supply of RM / stores &

spares, etc.

Level of activity & Operating Cycle

FACTORS INFLUENCING WORKING CAPITAL REQUIREMENT

A) Fund Based

Cash Credit / Overdraft Packing Credit

Demand Loan Bill Finance

B) Non Fund Based

Letter of Credit Bank Guarantee

WORKING CAPITAL FINANCE

Operating Cycle Method

Drawing Power Method

Turnover Method

MPBF Method

Cash Budget Method

WORKING CAPITAL ASSESSMENT METHODS

A. Length of Operating Cycle

a. Procurement of Raw Materialb. Conversion / Process timec. Average Finished Goods Holding Periodd. Average Collection Periode. Average Supplier’s Credit Periodf. Operating Cycle (a + b + c + d - e)g. No. of Operating Cycles in a year(365 days / f)

OPERATING CYCLE METHOD

Working capital requirement

Operating Expenses p.a.= --------------------------------------------- No. of Operating Cycles in a year

……OPERATING CYCLE METHOD

Particulars Security Margin DPPaid Raw Material(RM-Creditors)

(a) (e) [a * (1-e)]

Semi Finished goods

(b) (f) [b * (1-f)]

Finished goods (c) (g) [c * (1-g)]Book debts (d) (h) [d * (1-h)]

Total

DRAWING POWER (DP) METHOD

A Sales TurnoverB 25% of Sales TurnoverC 5% of Sales Turnover projected as MarginD Actual NWC existing as per Last Financial

StatementE B – CF B – DG MPBF (E or F whichever is less)H Additional margin to be brought in (C-D)

TURNOVER METHOD(originally suggested by NAYAK Committee)

A Current AssetsB Current Liabilities other than Bank

BorrowingsC Working Capital Gap (A - B)D Minimum Stipulated NWC (25% of CA

excluding export receivables)E Actual / Projected NWCF C – DG C – EH MPBF (F or G whichever is less)

MPBF METHOD(TANDON’S II Method of Lending)

CASH BUDGET METHOD

Forecasted Cash Flow Statement showing

estimates of cash receipts, cash payments

and net cash balance over the project term.

Peak deficit is financed.

Banks & Financial Institutions supervise the

end use of the funds sanctioned through

actual Cash Flow.

For genuine trade & manufacturing transaction

Various Types: Discounting / Purchase of Bills of

Exchange Cheque Purchase Advance against delivery Advance against acceptance Packing Credit

BILL FINANCE

Letter of Credit:

Bills sent for Collection:

Bank Guarantee: Performance / FinancialInland / Foreign

NON FUND BASED LIMITS

For Existing Units: Intra-Firm Comparison (i.e. Trend Analysis) Inter-Firm Comparison Evidences (Orders in Hand, Orders in

Pipeline)

For New Units:Pure Play Technique

Note: Higher projections should be justified.

JUSTIFICATION OF THE PERFORMANCE PROJECTION