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State Bank of India. WORKING CAPITAL WC Assessment is outcome of two variables: The volume of activity – Production & Sales Required level of current.

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Presentation on theme: "State Bank of India. WORKING CAPITAL WC Assessment is outcome of two variables: The volume of activity – Production & Sales Required level of current."— Presentation transcript:

1 State Bank of India

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

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

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

9 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)

10 State Bank of India QUANTUM AND ASSESSMENT METHOD SEGMENTLIMITS (Rs. Cr)SUGGESTED METHOD SSI Upto 5Traditional & Nayak Committee (PAT) Above 5Project Balance Sheet SBFAll loansTraditional & Nayak Committee (PAT) Trade & Services Upto 1Traditional & Nayak Committee (PAT) Above 1 upto 5 Projected Balance Sheet & Nayak Committee (PAT) Above 5Projected Balance Sheet C & I Industrial Below 0.25Traditional & Nayak Committee (PAT) Above 0.25 & over upto 5 Projected Balance Sheet & Nayak Committee (PAT) Above 5Projected Balance Sheet

11 State Bank of India OPERATING CYCLE Length of Operating Cycle = = 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

12 State Bank of India OPERATING CYCLE WORKING CAPITAL ASSESSMENT 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)

13 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 /- Operating expensesRs /- What is Working Capital requirement? Operating Expenses = = 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.

14 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

15 State Bank of India Traditional Method ItemStocking period WC required Margin (%) Amt Permissible Limit Raw Material1 m Work in process2 w Finished Goods2 w Receivable1 m90(100) Expenses1 m Total Less: Advance Payment15 Credit on purchase10 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

16 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

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

18 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)

19 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)

20 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

21 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

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

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

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

25 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)

26 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.

27 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)

28 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

29 State Bank of India Month Sales Receipts Cash Sales Collections Payments To Creditors Wages Others Surplus/Deficit BF Cash Cum. Cash Cash in Hand10 Cum.Surplus/ Deficit

30 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)

31 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

32 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

33 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)

34 State Bank of India

35 TRADITIONAL METHOD ItemStocking / Payment period WC required Margin (%) Amt Permissible Limit Raw Material1 m25 Work in process2 w25 Finished Goods2 w25 Receivable1 m33 Expenses1 m100 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

36 State Bank of India TRADITIONAL METHOD ItemStocking / Payment period WC required Margin (%) Amt Permissible Limit Raw Material1 m Work in process2 w Finished Goods2 w Receivable1 m Expenses1 m Total Less: Advance Payment30 Credit on purchase80 Working Capital Required460 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 = 410


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