1. WORKING CAPITAL
ASSESSMENT

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

4. Working Capital Limit Generally for 12 months, or
Seasonal industry – short duration / Peak & Non-peak level,
Subject to specific repayment schedule, viz EPC
Renewal necessary (within 180 days to avoid its becoming NPA)

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. DELAY IN COLLECTION OF DATA
Renewal possible:
Ad-hoc loans & continuation of existing limit
For renewal & enhancement – SB 9 & above
For renewal at existing level – SB 10 & below Subject to Review based on Audited Financial Statements within 6 months

8. WORKING CAPITAL LIMIT Formats for submission of Proposals:
FB + NFB Limits (New/Renewal/Enhancements)
Below Rs. 25 lacs: Usual Appraisal Format
Rs.25 lacs & above: Form ‘S’

9. 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)

10. 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
Trade
& Services
Upto 1
Traditional & Nayak Committee (PAT)
Above 1
upto 5
Projected Balance Sheet &
Nayak Committee (PAT)
Projected Balance Sheet
C & I Industrial
Below 0.25
Above 0.25 & over upto 5

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

12. WORKING CAPITAL ASSESSMENT
OPERATING CYCLE
Time taken between cash outlay and cash realisation through sale of finished goods & realisation of receivables is known as length of operating cycle. Consists of:
Time taken to acquire and average storage period of raw material
Conversion process time
Average period for which finished goods are in store
Average collection period of receivables (Sundry Debtors)
WORKING CAPITAL ASSESSMENT

13. OPERATING CYCLE: PERMISSIBLE BANK FINANCE
Operating cycle is 120 day (4 months) or 3 cycles in a year
Sales (P.A.) Rs /-
Operating expenses Rs /-
What is Working Capital requirement?
Operating Expenses
= = Rs 60000/-
No of cycles per annum
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.
WORKING CAPITAL ASSESSMENT

14. Measuring Period for W C Components
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

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

16. 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

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

18. Projected Balance Sheet Method Validation of Current Liabilities
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)

19. Projected Balance Sheet Method Validation of Current Assets
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)

20. 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

21. 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

22. Validation of SIP Holding
Processing time
Processing technology
No. of shifts

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

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

25. 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)

26. 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.

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

28. 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

29. Month 1 2 3 4 5 6 7 8 9 10 11 12
Sales
540
720
360
100
180
300
240
450
Receipts
351
531
657
414
334
147
288
348
258
261
Cash Sales 54 72 36 18 30 24 45
Collections
297
459
621
378
324
129
150
252
315
234
216
Payments
383
536
633
356
317
172
221
314
381
338
254
311
To Creditors
504 70
126
210
168
Wages 81
108 15 27 68
Others 50 75
Surplus/Deficit
-32 -5 58 17
-25
-41
-26
-30
-50
BF Cash
-22
-27 -3 55 47
-20
-40
-36
Cum. Cash
-86
Cash in Hand
Cum.Surplus/Deficit
-37
-13 62 37 -4
-60
-46
-96

30. 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)

31. TURNOVER METHOD 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

32. Projected Annual Turnover Method
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 240

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

35. TRADITIONAL METHOD Liquid surplus in BS at the end of last year = 50
Name of the Unit: ABC Ltd Credit on purchases (Rs. In 000’s)
Anticipated monthly sales = Cost of Production per month =190
Cost of Raw Material per month = Advance Payments from Customers 30
Item
Stocking /
Payment period
WC required
Margin
(%)
Amt
Permissible Limit
Raw Material
1 m 25
Work in process
2 w
Finished Goods
Receivable 33
Expenses
100
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

36. TRADITIONAL METHOD Liquid surplus in BS at the end of last year = 50
Name of the Unit: ABC Ltd Credit on purchases (Rs. In 000’s)
Anticipated monthly sales = Cost of Production per month = 190
Cost of Raw Material per month = Advance Payments from Customers 30
Item
Stocking /
Payment period
WC required
Margin
(%)
Amt
Permissible Limit
Raw Material
1 m
150 25 37
113
Work in process
2 w 95 24 71
Finished Goods
Receivable
190 33 66
134
Expenses 40
100 00
Total
570
389
Less: Advance Payment 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 = 410