WORKING CAPITAL ASSESSMENT

1. WORKING CAPITAL ASSESSMENT

2. 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 WORKING CAPITAL

3. Own funds Bank borrowings Sundry Creditors Advances from customers Deposits due in a year Other current liabilities What are Working Capital Sources?

4. 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) Working Capital Limit

5. Renewal of Limits • 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

6. WORKING CAPITAL LIMIT • A note containing major developments in : • Production facilities • Marketing • Expansion Plan • Industrial Relations • Prospects of the Industry • Management set-up • Major shareholders etc. • Assumptions & assessment of Credit Requirement

7. Working Capital Assessment Methods: • Operating Cycle Method • Traditional method • Projected Balance Sheet method • Cash Budget method • Projected Annual Turnover method (Nayak Committee) WORKING CAPITAL ASSESSMENT

8. QUANTUM AND ASSESSMENT METHOD

9. Cash OPERATING CYCLE 30 Days OPERATING CYCLE 60 Days Raw Material Bills Receivable Finished Goods Stock in Process 20 Days 10 Days Length of Operating Cycle = 60+10+20+30 = 120 days i.e. 3 Cycles in a year (365 / 120) WORKING CAPITAL ASSESSMENT

10. 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: • Level of operating expenses or Level of Operations. • Length of operating cycle. • Reduction in either will bring down WC requirement. • Reduction also indicates improved efficiency in WC Mgt. OPERATING CYCLE: PERMISSIBLE BANK FINANCE WORKING CAPITAL ASSESSMENT

11. RM Holding Period: (Stock of RM * 365 / Annual Consumption of RM) • SIP Holding Period : (SIP * 365 / Cost of Production) • Fin. Goods Holding Period : (FG Level * 365 / Cost of Sales) • Receivables Holding Period : (Bills Receivable * 365 /Annual Gross Sales) • Advances paid to Suppliers Period : (Advances paid * 365 / Annual Purchases) • Trade Creditors Holding Period : (TC Level * 365 / Annual Purchases) • Adv. Recd. against Sales Period : (Advance Received * 365 / Annual Gross Sales) • Stage wise monitoring not possible. Rely on Averages Measuring Period for W C Components

12. Unit: ABC Ltd (Rs. In lacs) Monthly sales = 100 Cost of Production P.M. = 90 Cost of Raw Material per month = 80 Traditional Method Liquid surplus in BS at the end of last year = 40 Limit from Bank = 190 Net Deficit = 245 – 40 = 205

13. 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 Projected Balance Sheet Method

14. Obtain Data on CMA (separate projections for Peak / Non-peak) • Validate Current Liabilities ? • Validate Current Assets ? Projected Balance Sheet Method

15. Short term borrowings (including bills purchased) Unsecured loans Public deposits maturing within one year Sundry Creditors (trade) Interest / other charges accrued & due Advance / progress payment from customers Deposit from dealers (subject to conditions) Install. of term loans / debentures / redeemable preference shares (falling due in next 12 months) Statutory liabilities Misc. C.L. - Dividends & other payments (falling due in next 12 months) Projected Balance Sheet MethodValidation of Current Liabilities

16. Cash & Bank Balance Investments : a) Govt. & other Trustee Securities b) Fixed Deposits with Banks Receivables Instalments of deferred receivables due within one year Raw Material / components used in manufacturing SIP & Finished Goods Advance payment of Tax Pre - paid expenses Advance for purchase of raw materials etc. Receivable from sale of fixed assets ( in 12months) Projected Balance Sheet Method Validation of Current Assets

17. Trends • Inter-firm comparison • Industry Levels • Borrowers specific strengths & weaknesses • Suggested levels of inventory & receivables • Production Policy – Constant/seasonal Levels of Inventory, Receivables & Sundry Creditors

18. Average consumption / holding • Source – local / outside / abroad • Time taken • Minimum order quantity • Cost of holding • Criticality • Transport Cost • Credit available • Seasonality Validation of Raw Material Holding

19. Processing time • Processing technology • No. of shifts Validation of SIP Holding

20. Firm order or anticipated order • Minimum despatch quantity • Transport availability / cost • Seasonality • Marketing arrangement Validation of Finished Goods Holding

21. Trade practices • Market conditions • Bulk sales - benefits • Price advantage • Seasonality (vis. rain coats, woollen garments) Sundry Debtors

22. PBS (ASSESSED BANK FINANCE) METHOD

23. Benchmark current ratio is 1.33 Depends upon: • Size of operation • Overall financial position • Term Loan installments • Export oriented units • Expansion of existing capacity • Setting up new unit • Reduction in level of deposits accepted, etc. Evaluation of Liquidity

24. L/C From Approved Bank • (Outside The ABF) • L/C From Not Approved Bank • (Within The ABF) Bills Purchased Under L/C

25. 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 Cash Budget Method

27. 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) Projected Turnover Method (Nayak Committee)

28. COMPUTATION Annual Turnover as projected by Borrower Turnover as accepted by Bank Working Capital Requirement (25% of B) Minimum margin required (5% of B) Actual Margin available (CA - CL) Item C - item D Item C - item E Min. WC Finance - F or G, whichever is less TURNOVER METHOD

29. COMPUTATION Annual Turnover as projected by Borrower 1200 Turnover as accepted by Bank 1200 Working Capital Requirement (25% of B) 300 Minimum margin required (5% of B) 60 Actual Margin available (CA - CL) 20 Item C - item D 240 Item C - item E 280 Min. WC Finance - F or G, whichever is less 240 Projected Annual Turnover Method

30. LC Assessment

32. Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000’s) Anticipated monthly sales = 200 Cost of Production per month =190 Cost of Raw Material per month = 150 Advance Payments from Customers 30 TRADITIONAL METHOD Liquid surplus in BS at the end of last year = 50 Pl work out Cash Credit Limit from Bank Net Deficit

33. Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000’s) Anticipated monthly sales = 200 Cost of Production per month = 190 Cost of Raw Material per month = 150 Advance Payments from Customers 30 TRADITIONAL METHOD Liquid surplus in BS at the end of last year = 50 Cash Credit Limit from Bank = 390 Net Deficit 460 - 50 = 410