Working capital assessment

1. State Bank of India

2. 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

3. 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

4. State Bank of India
Working Capital Limit
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)

5. State Bank of India
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
Renewal of Limits

6. State Bank of India
Anotecontainingmajordevelopmentsin:
ØProductionfacilities
ØMarketing
ØExpansionPlan
ØIndustrialRelations
ØProspectsoftheIndustry
ØManagementset-up
ØMajorshareholdersetc.
Assumptions&assessmentofCreditRequirement
WORKING CAPITAL LIMIT

7. 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)

8. State Bank of India
QUANTUM AND ASSESSMENT METHOD
SEGMENT LIMITS (Rs. Cr) SUGGESTED METHOD
SSI
Upto 5 Traditional & Nayak Committee (PAT)
Above 5 Project Balance Sheet
SBF All loans Traditional & Nayak Committee (PAT)
Trade
& Services
Upto 1 Traditional & Nayak Committee (PAT)
Above 1
upto 5
Projected Balance Sheet &
Nayak Committee (PAT)
Above 5 Projected Balance Sheet
C & I
Industrial
Below 0.25 Traditional & Nayak Committee (PAT)
Above 0.25 &
over upto 5
Projected Balance Sheet &
Nayak Committee (PAT)
Above 5 Projected Balance Sheet

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

10. State Bank of India
OPERATING CYCLE: PERMISSIBLE BANK FINANCE
WORKING CAPITAL ASSESSMENT
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.

11. 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

12. State Bank of India
Traditional Method
Item Stocking
period
WC
required
Margin
(%)
AmtPermissible
Limit
Raw Material 1 m 80 20 16 64
Work in process 2 w 45 33 15 30
Finished Goods 2 w 45 20 09 36
Receivable 1 m 90(100)4040 60
Expenses 1 m 10 100 10 -
Total 270 190
Less: Advance Payment 15
Credit on purchase 10
Working Capital
Required
245
Unit: ABC Ltd (Rs. In lacs)
Monthly sales = 100 Cost of Production P.M. = 90
Cost of Raw Material per month = 80
Liquid surplus in BS at the end of last year = 40
Limit from Bank = 190
Net Deficit = 245 –40 = 205

13. 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

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

15. State Bank of India
Projected Balance Sheet Method
Validation of Current Liabilities
1.Short term borrowings (including bills purchased)
2.Unsecured loans
3.Public deposits maturing within one year
4.Sundry Creditors (trade)
5.Interest / other charges accrued & due
6.Advance / progress payment from customers
7.Deposit from dealers (subject to conditions)
8.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)

16. 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
1.Receivables
2.Instalments of deferred receivables due within one year
3.Raw Material / components used in manufacturing
4.SIP & Finished Goods
5.Advance payment of Tax
6.Pre -paid expenses
7.Advance for purchase of raw materials etc.
8.Receivable from sale of fixed assets ( in 12months)

17. 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

18. 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

19. State Bank of India
Validation of SIP Holding
Processing time
Processing technology
No. of shifts

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

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

22. State Bank of India
PBS (ASSESSED BANK FINANCE) METHOD
Previous
Year
Current
Year
Next
Year
A Total CA
B Other CL
C Working Capital Gap (A -B)
D Net Working Capital (Actual / Projected)
E Assessed Ban Finance (ABF) (C -D)
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)

23. 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.

24. 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)

25. 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

26. State Bank of IndiaMonth 1 2 3 4 5 6 7 8 9101112
Sales 540720360360100180300360360240240450
Receipts 351531657414334147180288351348258261
Cash Sales 5472363610183036362424 45
Collections 297459621378324129150252315324234216
Payments 383536633356317172221314381338254311
To Creditors25237850425225270126210252252168168
Wages 81108545415274554543636 68
Others 5050755050755050755050 75
Surplus/Deficit-32-5245817-25-41-26-3010 4-50
BF Cash 10-22-27-3557247 6-20-50-40-36
Cum. Cash -22-27-3557247 6-20-50-40-36-86
Cash in Hand 1010101010101010101010 10
Cum.Surplus/
Deficit
-32-37-13456237-4-30-60-50-46-96

27. 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)

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

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

30. State Bank of India
LC Assessment
FLCILC
1Annual purchase/import
2Out of (1) on credit basis
3Out of (2) on usance LC basis
4Average of (3) per month
5Lead time (no. of months)
6Usance period (no. of months)
7Usance LC requirement (5+6) X (4)

31. State Bank of IndiaThank You

32. State Bank of India
TRADITIONAL METHOD
Item Stocking /
Payment
period
WC
required
Margin
(%)
Amt Permissible
Limit
Raw Material 1 m 25
Work in process 2 w 25
Finished Goods 2 w 25
Receivable 1 m 33
Expenses 1 m 100
Total
Less: Advance Payment
Credit on purchase
Working Capital Required
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
Liquid surplus in BS at the end of last year = 50
Pl work out Cash Credit Limit from Bank
Net Deficit

33. State Bank of India
TRADITIONAL METHOD
Item Stocking /
Payment
period
WC
required
Margin
(%)
Amt Permissible
Limit
Raw Material 1 m 150 25 37 113
Work in process 2 w 95 25 24 71
Finished Goods 2 w 95 25 24 71
Receivable 1 m 190 33 66 134
Expenses 1 m 40 100 40 00
Total 570 389
Less: Advance Payment 30
Credit on purchase 80
Working Capital Required 460
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
Liquid surplus in BS at the end of last year = 50
Cash Credit Limit from Bank = 390
Net Deficit 460 -50 = 410