WORKING CAPITAL ASSESSMENT

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

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

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)

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

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

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

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’

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)

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

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 = 60+10+20+30 = 120 days i.e. 3 Cycles in a year (365 / 120) WORKING CAPITAL ASSESSMENT

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

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: 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

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

Traditional Method Total 270 190 245 Unit: ABC Ltd (Rs. In lacs) Monthly sales = 100 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

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

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

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)

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)

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

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

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

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

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

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)

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.

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

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 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

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)

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

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

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)

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

TRADITIONAL METHOD Liquid surplus in BS at the end of last year = 50 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 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 460 - 50 = 410