WORKING CAPITAL

ASSESSMENT

CS Deepak P Singh (9920830041)

Funds required to acquire Funds required to acquire current assets to enable current assets to enable business/industry business/industry

to operate at the expected to operate at the expected levels.levels.

What is Working Capital ?What is Working Capital ?

Cs Deepak P Singh

CONCEPTS OF WORKING CAPITALCONCEPTS OF WORKING CAPITAL

GROSS WORKING CAPITAL = CA

These are in the system used/ consumed on a day to day basis.

NET WORKING CAPITAL = CA – CL OR

(SHF + TL) – (NFA + NCA)NWC is the entrepreneur's margin available in

the system from Long term FundsCs Deepak P Singh

What are Current Assets ?What are Current Assets ?Assets which normally get converted into cash during the operating cycle of the firm. Cash & Bank balances Inventory Receivables Advances to suppliers/othersOther Current assets Cs Deepak P Singh

What are Working Capital Sources?What are Working Capital Sources?

Own fundsOwn funds Bank borrowingsBank borrowings Sundry CreditorsSundry Creditors Advances from customersAdvances from customers Deposits due in a year Deposits due in a year Other current liabilitiesOther current liabilities

Cs Deepak P Singh

OPERATING CYCLEOPERATING CYCLE

Stages: Stages:

1)1) Raw materials (RM/RM consumption)Raw materials (RM/RM consumption)

2)2) Work-in-process (WIP/COP)Work-in-process (WIP/COP)

3)3) Finished Goods (FG/COS)Finished Goods (FG/COS)

4)4) Receivables (Debtors/Credit sales)Receivables (Debtors/Credit sales)

Less:Less:

Creditors (creditors/purchases)Creditors (creditors/purchases)

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

Cs Deepak P Singh

Service

Length of Operating Cycle

Receivables

Cash

Trade Industry

CashCash

Stocks

Receivables Receivables

Finished Goods

Semi Finished Goods

Raw Material

CS Deepak P Singh

FACTORS INFULENCING WORKING FACTORS INFULENCING WORKING CAPITAL REQUIREMENTCAPITAL REQUIREMENT

Nature of business – Nature of business – service/trade/manufacturing.service/trade/manufacturing.Seasonality of operations – peak/non peakSeasonality of operations – peak/non peakProduction Policy – Constant/seasonalProduction Policy – Constant/seasonalMarket conditions- competition/credit termsMarket conditions- competition/credit termsConditions of supply of RM/stores/spares Conditions of supply of RM/stores/spares etc.etc.Quantum of production/Turnover(level of Quantum of production/Turnover(level of activity)activity)Operating CycleOperating CycleCurrent Assets to be maintainedCurrent Assets to be maintained

Cs Deepak P Singh

DATA TO BE OBTAINEDDATA TO BE OBTAINED

Application.Application.

Financial Statements of Financial Statements of Previous yearsPrevious years

Estimates/ Projections (with Estimates/ Projections (with quantitative details)quantitative details)

Cs Deepak P Singh

Working Capital FinanceWorking Capital Finance

A) Fund BasedA) Fund BasedInventory finance and Inventory finance and

Bill Finance ( Post Sales Finance).Bill Finance ( Post Sales Finance).

B) Non Fund BasedB) Non Fund Based Letter of Credit (LC)Letter of Credit (LC)

Bank Guarantee.Bank Guarantee.

Cs Deepak P Singh

Assessment MethodsAssessment Methods

Operating Cycle MethodOperating Cycle MethodService SectorService Sector

TradersTraders

Manufacturing Activity. Manufacturing Activity.

Drawing Power Method.Drawing Power Method.

Turnover Method.Turnover Method.

……. Assessment Methods. Assessment Methods

MPBF method (II method of lending) for MPBF method (II method of lending) for limits of Rs 6.00 crores and abovelimits of Rs 6.00 crores and above

Cash Budget method Cash Budget method (Reason: Based on procurement and cash (Reason: Based on procurement and cash

inflow)inflow) Seasonal Industries (Sugar/ Rice Seasonal Industries (Sugar/ Rice

Mills/Textiles/Tea/Tobacco/Fertilizers)Mills/Textiles/Tea/Tobacco/Fertilizers) Contractors & Real Estate DevelopersContractors & Real Estate Developers Educational InstitutionsEducational Institutions

Operating Cycle MethodOperating Cycle Method

Working capital requirement

Operating expenses

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No. of operating cycles in a year

Operating Cycle MethodOperating Cycle Method

A. Length of operating Cycle

a. Procurment of Raw Materiala. Procurment of Raw Material 30 days30 days

b. Conversion / Process timeb. Conversion / Process time 15 days15 days

c. Average time of holding of FGc. Average time of holding of FG 15 days15 days

d. Average Collection Periodd. Average Collection Period 30 days30 days

e.Operating Cycle (a+b+c+d)e.Operating Cycle (a+b+c+d) 90 days90 days

f. Operating Cycle in a year f. Operating Cycle in a year (365days/e)(365days/e)

4 cycle4 cycle

……..Operating Cycle Method..Operating Cycle Method

B. Total Operating Expenses B. Total Operating Expenses per per

Annum Annum

Rs 60.00 Rs 60.00 lakhslakhs

C. Total Turnover per AnnumC. Total Turnover per Annum Rs 70.00 Rs 70.00 lakhslakhs

D. Working Capital D. Working Capital RequirementRequirement

= Total Operating Expenses = Total Operating Expenses (B)/ No. of operating Cycle (f (B)/ No. of operating Cycle (f as said earlier)as said earlier)

Rs 15 lakhsRs 15 lakhs

Drawing Power MethodDrawing Power Method(for units with small limits)(for units with small limits)

ParticularsParticulars Stock Stock valuevalue

MarginMargin DPDP

Paid stocks (RM-Paid stocks (RM-Creditors)Creditors)

44 25%25% 33

Semi Finished goodsSemi Finished goods 44 50%50% 22

Finished goodsFinished goods 44 25%25% 33

Book debtsBook debts 44 50%50% 22

TotalTotal 1616 1010

(Rs.in lacs)

Turnover MethodTurnover Method(originally suggested by Nayak Committee for SSI units)(originally suggested by Nayak Committee for SSI units)

AA Sales TurnoverSales Turnover

BB 25% of sales Turnover25% of sales Turnover

CC 5% of Sales Turnover projected as 5% of Sales Turnover projected as marginmargin

DD Actual NWC existing as per Last Financial Actual NWC existing as per Last Financial StatementStatement

EE B – CB – C

FF B – DB – D

GG MPBF (E or F whichever is less)MPBF (E or F whichever is less)

HH Additional margin to be brought in (C-Additional margin to be brought in (C-D)D)

Applicable for limits upto Rs.6 croresApplicable for limits upto Rs.6 crores

MPBF Method MPBF Method Tandon’s II method of lending)Tandon’s II method of lending)

AA Current AssetsCurrent Assets

BB Current Liab. other than Bank Current Liab. other than Bank BorrowingsBorrowings

CC Working Capital gap (A-B)Working Capital gap (A-B)

DD Minimum Stipulated NWC Minimum Stipulated NWC (25% of CA excluding export receivables)(25% of CA excluding export receivables)

EE Actual/projected NWCActual/projected NWC

FF C – DC – D

GG C – EC – E

HH MPBF (F or G whichever is less)MPBF (F or G whichever is less)

II Excess borrowings/short fall in NWC Excess borrowings/short fall in NWC (D-E) (D-E)

Justifications of the Performance ProjectionJustifications of the Performance Projection

(Inventory/Receivable Norms – (Inventory/Receivable Norms – Comparison)Comparison)

Intra firm ComparisonIntra firm Comparison Comparison of estimates with previous Comparison of estimates with previous

years Actuals.years Actuals.

For New UnitsFor New Units Comparison of estimates with similar Comparison of estimates with similar

units in the area of operation.units in the area of operation. Higher projections shall be justified.Higher projections shall be justified.

MPBF Method MPBF Method Tandon’s II method of lending)Tandon’s II method of lending)

Excess borrowing ( short Excess borrowing ( short fall in NWC ) shall be fall in NWC ) shall be ensured by additional funds ensured by additional funds to be brought in by the to be brought in by the applicant or by additional applicant or by additional bank finance over MPBF.bank finance over MPBF.

Important Aspects of MPBF methodImportant Aspects of MPBF method

Production/Sales estimatesProduction/Sales estimates

Profitability estimatesProfitability estimates

Inventory/receivables normsInventory/receivables norms

Build up of Net Working CapitalBuild up of Net Working Capital

Cash BudgetCash Budget

Statement showing forecast of cash receipts, cash payments and net cash balance over a period of time

Months->Months-> 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 11 1211 12

Cash ReceiptsCash Receipts

Cash PaymentsCash Payments

Surplus/deficitSurplus/deficit

Cash credit – OBCash credit – OB

Cash credit - CBCash credit - CBPeak deficit is financed and drawings regulated by monthly budgets

Cash BudgetCash BudgetAdvantages:

•Suitable for seasonal industries, contractors, software

exporters etc.

Limitations: •Will not reflect changes in various current assets and

liabilities.•Will it give a clue whether a company is earning

•profit or not.

Funds flow statement is required to detect any diversion of funds.

BIFURCATION OF FUND BASED LIMITSBIFURCATION OF FUND BASED LIMITS

Inventory: OCC/KCC/PC/COD/SODBills : CBP/DBP/SBP/FBP

CUBD/DUBD/FUBD Inventory Limit

A. Total Inventory

B. Creditors

C. Margin

D. Paid Inventory (A-B)

E. Inventory Limit ( D-C)

(Cont…)

…….BIFURCATION OF FUND BASED .BIFURCATION OF FUND BASED LIMITSLIMITS

Bills /Book Debts Limit

A. Receivables/ Sundry Debtors

B. Margin

C. Bills Limit ( A-B). Loan delivery system (FB W/C limits of

Rs.10 crores & above from banking system)

Cash Credit - 20%

Demand Loan – 80%  

Loan Delivery SystemLoan Delivery System

Objectives Loan delivery system (FB W/C limits of

Rs.10 crores & above from banking system)

Cash Credit - 20%

Demand Loan – 80%   Domestic Credit portion to be bifurcated into

loan component and Cash Credit Relaxation.

Bill Finance -Post Sales FinanceBill Finance -Post Sales Finance(For Genuine Trade & Manufacturing Transactions)(For Genuine Trade & Manufacturing Transactions)

A.A. DBPs : Bills of Exchange accompanied with ; DBPs : Bills of Exchange accompanied with ; I) Invoice and I) Invoice and

ii) Documents of title of the Goods - LRS/RRSii) Documents of title of the Goods - LRS/RRS

A.A. DUBD : Invoice /LRS / RRS – Maximum Tenor DUBD : Invoice /LRS / RRS – Maximum Tenor 180 days180 days

B.B. CUBD : Bill of Exchange / Promissory Notes.CUBD : Bill of Exchange / Promissory Notes.

- Eligibility Carved out of MPBF- Eligibility Carved out of MPBF

C.C. Export Bills : FBP/FUBDExport Bills : FBP/FUBD

- Security – Export Documents drawn against - Security – Export Documents drawn against confirmed orders / LCs.confirmed orders / LCs.

……Bill Finance -Post Sales FinanceBill Finance -Post Sales Finance(For Genuine Trade & Manufacturing Transactions)(For Genuine Trade & Manufacturing Transactions)

A.A. Book Debts Finance :Book Debts Finance :A.A. Service Industry / Contractors Service Industry / Contractors

B.B. Margin 50%Margin 50%

C.C. Age not more than 90 daysAge not more than 90 days

D.D. Collateral Security – 200% Urban / Collateral Security – 200% Urban / Semi Urban Security.Semi Urban Security.

Non Fund Based LimitsNon Fund Based Limits

Letter of credit Letter of credit ILC/FLCILC/FLC

Usance/SightUsance/Sight

Bank Guarantee Bank Guarantee PerformancePerformance Financial – Bid Bonds/Security Deposits/ Financial – Bid Bonds/Security Deposits/ Mobilisation advance/retention Mobilisation advance/retention

money money

Deferred Payment GuaranteeDeferred Payment Guarantee

CS Deepak P. Singh (9920830041)CS Deepak P. Singh (9920830041)

LC AssessmentLC Assessment

11 Annual purchase/importAnnual purchase/import FLC/ILCFLC/ILC

22 Out of (1) on credit basisOut of (1) on credit basis

33 Out of (2) on usance LC basisOut of (2) on usance LC basis

44 Average of (3) per monthAverage of (3) per month

55 Lead time (no. of months)Lead time (no. of months)

66 Usance period (no. of months)Usance period (no. of months)

77 Usance LC requirement (5+6) X Usance LC requirement (5+6) X (4)(4)

Guidelines to be followedGuidelines to be followed

For constituents borrowers with regular For constituents borrowers with regular sanctioned credit facilities for genuine sanctioned credit facilities for genuine transactions.transactions.

LCs shall not be opened with clause LCs shall not be opened with clause without recourse to drawer.without recourse to drawer.

Bank Guarantees:Bank Guarantees:Performance and Financial Guarantees Performance and Financial Guarantees

Purpose / DifferencePurpose / Difference

Security:Security: Cash Margin +Counter Cash Margin +Counter Guarantee +Collateral Security Guarantee +Collateral Security (Immovable / Liquid Security)(Immovable / Liquid Security)

Restrictive Clause. Restrictive Clause.

Important RatiosImportant Ratios

Current Ratio (CA/CL)Current Ratio (CA/CL) (norm – 1.15 upto Rs.6 crores/1.33 for (norm – 1.15 upto Rs.6 crores/1.33 for

above)above)

Adjusted Current Ratio Adjusted Current Ratio (reduce export bills discounted from BB & (reduce export bills discounted from BB &

CA)CA)

Total debt equity (TOL/TNW) Total debt equity (TOL/TNW) (Maximum norm : 6)(Maximum norm : 6)

CS Deepak P. Singh(9920830041)CS Deepak P. Singh(9920830041) 3333

Gearing Ratio Gearing Ratio (for NFB Limits)(for NFB Limits)

Total Outside Liabilities + 100% of NFB LimitsTotal Outside Liabilities + 100% of NFB Limits------------------------------------------------------------------------------------------------------------------------------------------------------Net Worth – (NCA+Investments in associate Net Worth – (NCA+Investments in associate concerns)concerns)

Notes: TOL (excluding Notes: TOL (excluding Sundry creditors representing stocks procured under Sundry creditors representing stocks procured under LC/BG and LC/BG and mobilisation advance outstanding against BGs) mobilisation advance outstanding against BGs) NW (excluding Intangible Assets)NW (excluding Intangible Assets) NCA (excluding advances given for capital goods for business purpose)NCA (excluding advances given for capital goods for business purpose)

Maximum Norm:Maximum Norm: 10

Exposure Norms for some CategoriesExposure Norms for some Categories

CategoryCategory Ceiling on borrowingsCeiling on borrowings

Constructions Constructions contractorscontractors

FB + NFB limits shall FB + NFB limits shall not exceed 15 times not exceed 15 times net owned fundsnet owned funds

Housing Finance Housing Finance InstitutionsInstitutions

Borrowings shall be Borrowings shall be restricted to 3 times restricted to 3 times the net owned fundsthe net owned funds

Cs Deepak P Singh (9920830041)