Assessment of Working

Capital
D V Deshpande
dvdesh@gmail.com,
(M) 9919225539
Coverage
• Concept of working capital
• Operating cycle
• Methods of assessment of working capital
• MPBF
• Turnover method & Cash budget menthod
Concept of working capital
• “Working capital” means requirement of funds for day to day working
– i.e., for:
• Purchasing raw material
• Payments for power, water, labour, etc
• Other operational expenses
• Working capital gap = current assets – current liabilities
Operating cycle-

Marketing Cash

Purchase
Finished
of Raw
goods
material

Goods in
process
Methods of assessment of working capital (WC)

• MPBF- Maximum Permissible Bank Finance

• Method 1- Maximum of 75% of Working capital gap (Current asset-
current liabilities) CA= 100, CL=20 = WCG = 80 MPBF= 75%of 80=60
• Method 2: 25% of CA to be funded by own & 75% by bank
• MPBF= (75%of 100=75)- CL 20= 55

• Turnover method – 20% of turnover- annual projected turnover

• If turnover is Rs 10 lakh: Then WC limit = Rs 2 lakh
• Cash budget method- statement of cash receipt & cash payment
• The deficit is supported through working capital
Thank you
Working capital limit- interest charged by bank
only on the limit utilised – i.e., amount drawn i.e.
loan outstanding