State Bank of India

State Bank of India

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
 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
 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)

 State Bank of India

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
 State Bank of India

WORKING CAPITAL LIMIT

 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
 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)
 State Bank of India

QUANTUM AND ASSESSMENT METHOD

SEGMENT LIMITS (Rs. Cr) SUGGESTED METHOD
Upto 5 Traditional & Nayak Committee (PAT)
SSI
Above 5 Project Balance Sheet

SBF All loans Traditional & Nayak Committee (PAT)

Upto 1 Traditional & Nayak Committee (PAT)

Trade Above 1 Projected Balance Sheet &
& Services upto 5 Nayak Committee (PAT)
Above 5 Projected Balance Sheet
Below 0.25 Traditional & Nayak Committee (PAT)
C&I Above 0.25 & Projected Balance Sheet &
Industrial over upto 5 Nayak Committee (PAT)
Above 5 Projected Balance Sheet
 State Bank of India

OPERATING CYCLE

30 Cash
Days 60
Days
Bills Raw
Receivable Material
OPERATING
CYCLE

20 Finished Stock in
Goods Process 10
Days
Days

Length of Operating Cycle = 60+10+20+30 = 120 days

i.e. 3 Cycles in a year (365 / 120)
WORKING CAPITAL ASSESSMENT
 State Bank of India

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:

(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.

WORKING CAPITAL ASSESSMENT

 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
 State Bank of India

Traditional Method
Unit: ABC Ltd (Rs. In lacs)
Monthly sales = 100 Cost of Production P.M. = 90
Cost of Raw Material per month = 80
Item Stocking WC Margin Amt Permissible
period required (%) Limit

Raw Material 1m 80 20 16 64
Work in process 2w 45 33 15 30
Finished Goods 2w 45 20 09 36
Receivable 1m 90 (100)40 40 60
Expenses 1m 10 100 10 -
Total 270 190
Less: Advance Payment 15
Credit on purchase 10
Working Capital 245
Required
Liquid surplus in BS at the end of last year = 40 Net Deficit = 245 – 40 = 205
Limit from Bank = 190
 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
 State Bank of India

Projected Balance Sheet Method

Obtain Data on CMA (separate projections for Peak / Non-peak)

Validate Current Liabilities ?

Validate Current Assets ?

 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)
 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)
 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
 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
 State Bank of India

Validation of SIP Holding

Processing time
Processing technology
No. of shifts
 State Bank of India

Validation of Finished Goods Holding

Firm order or anticipated order

Minimum despatch quantity
Transport availability / cost
Seasonality
Marketing arrangement
 State Bank of India

Sundry Debtors

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

PBS (ASSESSED BANK FINANCE) METHOD

Previous Current Next
Year Year 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)
 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.
 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)
 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
Month 1 2 3 4 5 6 7 8 9 State Bank
10 11 of India
12
Sales 540 720 360 360 100 180 300 360 360 240 240 450
Receipts 351 531 657 414 334 147 180 288 351 348 258 261

Cash Sales 54 72 36 36 10 18 30 36 36 24 24 45

Collections 297 459 621 378 324 129 150 252 315 324 234 216
Payments 383 536 633 356 317 172 221 314 381 338 254 311

To Creditors 252 378 504 252 252 70 126 210 252 252 168 168

Wages 81 108 54 54 15 27 45 54 54 36 36 68
Others 50 50 75 50 50 75 50 50 75 50 50 75
Surplus/Deficit -32 -5 24 58 17 -25 -41 -26 -30 10 4 -50

BF Cash 10 -22 -27 -3 55 72 47 6 -20 -50 -40 -36

Cum. Cash -22 -27 -3 55 72 47 6 -20 -50 -40 -36 -86

Cash in Hand 10 10 10 10 10 10 10 10 10 10 10 10

Cum.Surplus/ -32 -37 -13 45 62 37 -4 -30 -60 -50 -46 -96

Deficit
 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)
 State Bank of India

TURNOVER METHOD
COMPUTATION
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
 State Bank of India

Projected Annual Turnover Method

COMPUTATION
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
 State Bank of India

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)
 State Bank of India

Thank You
 State Bank of India

TRADITIONAL METHOD
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 / WC Margin Amt Permissible
Payment required (%) Limit
period
Raw Material 1m 25
Work in process 2w 25
Finished Goods 2w 25
Receivable 1m 33
Expenses 1m 100
Total
Less: Advance Payment
Credit on purchase
Working Capital Required
Liquid surplus in BS at the end of last year = 50 Net Deficit
Pl work out Cash Credit Limit from Bank
 State Bank of India

TRADITIONAL METHOD
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 / WC Margin Amt Permissible
Payment required (%) Limit
period
Raw Material 1m 150 25 37 113
Work in process 2w 95 25 24 71
Finished Goods 2w 95 25 24 71
Receivable 1m 190 33 66 134
Expenses 1m 40 100 40 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 Net Deficit 460 - 50 = 410
Cash Credit Limit from Bank = 390