WORKING CAPITAL ASSESSMENT (By.CS Deepak P Singh )

WHAT IS WORKING CAPITAL ?
Funds required to acquire current assets to enable business/industry to operate  at the expected levels

CONCEPTS 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 Funds

WHAT ARE CURRENT ASSETS ? 

Assets which normally get converted into cash during the operating cycle of the firm.

WHAT ARE WORKING CAPITAL SOURCES ?

OPERATING CYCLE
begins with acquisition of raw materials and ends with collection of receivables

Stages:

1. Raw materials (RM/RM consumption)
2. Work-in-process (WIP/COP)
3. Finished Goods (FG/COS)
4. Receivables (Debtors/Credit sales)

    Less:
    Creditors (creditors/purchases)

 

FACTORS INFULENCING WORKING CAPITAL REQUIREMENT

DATA TO BE OBTAINED

WORKING CAPITAL FINANCE

A) Fund Based

B) Non Fund Based

ASSESSMENT METHODS

-> Operating Cycle Method

-> Drawing Power Method.
-> Turnover Method
-> MPBF method (II method of lending) for limits of Rs 6.00 crores and above
-> Cash Budget method 
 (Reason: Based on procurement and cash inflow)

OPERATING CYCLE METHOD
Working capital requirement : Operating expenses/No. of operating cycles in a year.

A. Length of operating Cycle
 

Turnover  Method
(originally suggested by Nayak Committee for SSI units)
Applicable for limits upto Rs.6 crores

Turnover  Method 

(originally suggested by Nayak Committee for SSI units)

MPBF Method
(Tandon’s II method of lending) 

Justifications of the Performance Projection

(Inventory/Receivable Norms – Comparison)

For New Units

MPBF Method
(Tandon’s II method of lending)

Important Aspects of MPBF method

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

Advantages: 

Limitations: 

BIFURCATION OF FUND BASED LIMITS

Inventory: OCC/KCC/PC/COD/SOD
Bills        : 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)

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 SYSTEM

Objectives
Loan delivery system (FB W/C limits of  Rs.10 crores & above from banking system)

Domestic Credit portion to be bifurcated into loan component and Cash Credit
Relaxation.

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

A. DBPs : Bills of Exchange accompanied with ;          

      i) Invoice and
      ii) Documents of title of the Goods - LRS/RRS

B. DUBD : Invoice /LRS / RRS – Maximum Tenor 180 days
C. CUBD  : Bill of Exchange / Promissory Notes.
  - Eligibility  Carved out of MPBF
D. Export Bills : FBP/FUBD
  - Security – Export Documents drawn against confirmed orders / LCs.

Book Debts Finance :

Non Fund Based Limits
Letter of credit

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

Deferred Payment Guarantee

LC Assessment

Guidelines to be followed

Bank Guarantees

Purpose / Difference

Important Ratios

Gearing Ratio (for NFB Limits) Maximum Norm:10

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

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

Exposure Norms for some Categories

Cs Deepak P Singh 

(9920830041)