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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 & Nonpeak level,
or
Subject to specific repayment schedule, viz EPC
Renewal necessary (within 180 days to avoid its becoming NPA)

State Bank of India

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 noncorporate 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

State Bank of India

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

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 METHOD


SEGMENT
SSI
SBF

Trade
& Services

C&I
Industrial

LIMITS (Rs. Cr)

SUGGESTED METHOD

Upto 5

Traditional & Nayak Committee (PAT)

Above 5

Project Balance Sheet

All loans

Traditional & Nayak Committee (PAT)

Upto 1

Traditional & Nayak Committee (PAT)

Above 1
upto 5

Projected Balance Sheet &


Nayak Committee (PAT)

Above 5

Projected Balance Sheet

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
30
Days

Cash
60
Days
Bills
Receivable

20
Days

OPERATING
CYCLE

Finished
Goods

Raw
Material

Stock in
Process

10
Days

Length of Operating Cycle = 60+10+20+30 = 120 days


i.e. 3 Cycles in a year (365 / 120)
WORKING CAPITAL ASSESSMENT

State Bank of India

OPERATING CYCLE: PERMISSIBLE BANK FINANCE


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.
WORKING CAPITAL ASSESSMENT

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

Unit: ABC Ltd


Monthly sales = 100
Cost of Raw Material per month = 80
Item

Stocking
period

(Rs. In lacs)
Cost of Production P.M. = 90

WC
required

Margin
(%)

Amt

Permissible
Limit

Raw Material

1m

80

20

16

64

Work in process

2w

45

33

15

30

Finished Goods

2w

45

20

09

36

Receivable

1m

90 (100)40

40

60

Expenses

1m

10

10

Total
Less: Advance Payment
Credit on purchase
Working Capital
Required

270

100

190

15
10

245

Liquid surplus in BS at the end of last year = 40


Limit 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 Liabilities


1.
2.
3.
4.
5.
6.
7.
8.

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)
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 Assets


1. 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) METHOD


Previous
Year
A

Total CA

Other CL

Working Capital Gap

Net Working Capital (Actual / Projected)

Assessed Ban Finance (ABF)

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)

(A - B)
(C - D)

Current
Year

Next
Year

State Bank of India

Evaluation of Liquidity
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.

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

Month

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

36

36

State Bank
10
11 of India
12

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

168

70

30

24

126 210 252 252 168

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

-32

-5

24

58

17

-25

-41

-26

-30

10

-50

10

-22

-27

-3

55

72

47

-20

-50

-40

-36

-22

-27

-3

55

72

47

-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

Surplus/Deficit
BF Cash
Cum. Cash

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
COMPUTATION
A.
B.
C.
D.
E.
F.
G.
H.

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

State Bank of India

Projected Annual Turnover Method


COMPUTATION
A.
B.
C.
D.
E.
F.
G.

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

1200
1200
300
60
20
240
280

H. Min. WC Finance - F or G, whichever is less 240

State Bank of India

LC Assessment
FLC ILC
1
2
3
4
5
6
7

Annual purchase/import
Out of (1) on credit basis
Out of (2) on usance LC basis
Average of (3) per month
Lead time (no. of months)
Usance period (no. of months)
Usance LC requirement (5+6) X (4)

State Bank of India

State Bank of India

TRADITIONAL METHOD
Name of the Unit: ABC Ltd Credit on purchases 80
(Rs. In 000s)
Anticipated monthly sales = 200
Cost of Production per month =190
Cost of Raw Material per month = 150 Advance Payments from Customers 30
Item

Stocking /
Payment
period

WC
required

Margin
(%)

Raw Material

1m

25

Work in process

2w

25

Finished Goods

2w

25

Receivable

1m

33

Expenses

1m

100

Amt

Total
Less: Advance Payment
Credit on purchase
Working Capital Required

Liquid surplus in BS at the end of last year = 50


Pl work out Cash Credit Limit from Bank

Net Deficit

Permissible
Limit

State Bank of India

TRADITIONAL METHOD
Name of the Unit: ABC Ltd Credit on purchases 80
(Rs. In 000s)
Anticipated monthly sales = 200
Cost of Production per month = 190
Cost of Raw Material per month = 150 Advance Payments from Customers 30
Item

Stocking /
Payment
period

WC
required

Margin
(%)

Amt

Permissible
Limit

Raw Material

1m

150

25

37

113

Work in process

2w

95

25

24

71

Finished Goods

2w

95

25

24

71

Receivable

1m

190

33

66

134

Expenses

1m

40

100

40

00

Total

570

Less: Advance Payment

389

30

Credit on purchase

80

Working Capital Required

460

Liquid surplus in BS at the end of last year = 50


Cash Credit Limit from Bank = 390

Net Deficit 460 - 50 = 410

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