working capital assessment
DESCRIPTION
TRANSCRIPT
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