Investment requirement

Assessment/Working Capital
Assessment
(Manufacturing, Trading and Service
with case study)

Md. Towhid Hossain

SVP, IRMD, HO, SIBL.
 Back Drop

1) Bank is an intermediary institution to transmit fund

from saver to user under legal frame work.
2) Bank’s business is mainly depends on public
confidence.
3) Banker’s challenge is to maintain/ continue public
confidence.
 Back Drop
4) To maintain/ continue public confidence banker’s
challenge is to return back the money to the
depositors as and when required by them.
5) To return back the money to the depositors as and
when required by them, banker’s challenge is to
maintain sufficient liquidity as per regulator’s
instruction and to deploy fund after proper
assessment and monitoring the utilization of fund to
return back the same with profit in time.
 Back Drop
6) The main causes for not returning of deployed fund
are diversion and poor appraisal of business need.
7) We are the Islamic Bank, working under a capitalistic
set environment and structure of conventional
banking, which have been developed and shaped
over a period of hundreds of years.
 Back Drop
8) The Banker-Customer relationship in conventional
banking is mainly based on Debtor and Creditor, while
in Islamic banking the relationship is based on
Partners in business and buyer & seller of goods.
9) Being a Partner and deferred seller of goods, the
Islamic bankers have to more careful regarding
assessment of Investment requirements.
 Assessment of Investment
Requirements
1) To earn profit and also to achieve institutional as well
as national economic goal banks have requirement of
sound investment/ loan & advances.
2) Entrepreneurs/ Customers requirement of
investment/ loan & advances to materialize their
individual dream/goal.
3) Without proper assessment of requirements, the
business may be over or less financed and investment
can’t be achieve the goal of entrepreneur and bank as
well.
 Capital
1) The wealth, as in money or property, employed in
business by an individual, firm etc.
2) Assets available for use in the production for further
assets.
3) Wealth in the form of money or property owned by
business and human resources of economic value.
4) Assets remaining after deduction of liabilities; the net
worth of a business, the ownership interest in a
business.
 Types of Capital
Any business requires two types of capital like
(i) Fixed/Permanent capital for acquisition of fixed
assets and other long term investments to run
the business and
(ii) Working Capital for carrying out its day to day
operations.
 Purposes of maintaining
Working Capital
i. For purchase of raw materials, stores and spares,
ii. For keeping fund blocked in finished stocks,
iii. For keeping funds blocked in receivables pending
final realization of the bills,
iv. For making advance payments to their suppliers for
ensuring continuous supply,
v. For meeting day to day expenses like payment of
wages, power bill etc.
 Assessment Methods
A. Operating Cycle/Tied up Period Method
i. Service Sector
ii. Traders
iii. Manufacturing Activity

B. Turnover Method
 Operating Cycle Method
Operating cycle is a continuous flow of operation which
starts from cash and back into cash by converting cash
into inventory, inventory into receivables and receivable
into cash. That is, it starts with the cash and uses a part
of the cash to acquire raw materials, to meet the
various manufacturing costs, etc. Raw materials are
converted into finished goods through work-in-process.
Finished goods get sold and become receivables. On
realization, receivables turn into cash. The cycle will
repeat itself as the business goes on.
 Operating Cycle Method

Cash Cash Cash

Receivables Receivables
Raw Material

Service Trade Industry

Finished Goods

Receivables Stocks Semi Finished Goods

Estimating Operating Cycle Financing Needs
[Operating Cycle/ Tied Up Period Method]
Stock of RM Holding Period of RM in Days (HPRM)
→
Work-in -Process Time Required of WIP (TRWIP)
→
Stock in Finished Goods Holding Period of FG in Days (HPFG)
→
Receivable Collecting Period of Receivable in Days
→ (CPR)
Operating Cycle (OC) Length of average OC in days =
→ HPRM+TRWIP+HPFG+CPR
Creditors Payment Period of Creditors in Days (PPC)
→
Financing Need Days of Financing Need =
→ HPRM+TRWIP+HPFG+CPR-PPC
 Turnover Method
For Small/Medium Enterprise Only
A Sales Turnover per annum
B 25% of sales Turnover
C 5% of Sales Turnover projected as margin
D MPBF* = (B – C)
*Maximum Permissible Bank Finance
 FACTORS INFULENCING WORKING
CAPITAL REQUIREMENT
 Nature of business –
service/trade/manufacturing.
 Seasonality of operations – peak/non peak
 Production Policy – Constant/seasonal
 Market conditions- competition/credit terms
 Conditions of supply of RM/stores/spares etc.
 Quantum of production/Turnover(level of
activity)
 Operating Cycle
 Current Assets to be maintained
 Case Study on
Working Capital Assessment
Mr. Mehedi Hassan proposes to establish a small scale
enterprise for assembling of bicycles. He will assemble
2000 bicycles per year at maximum attainable production
capacity. He is an expert mechanic, but does not know
much about accountancy. He applies to a bank for a Bai-
Muazzal/Bai-Murabaha limit of Tk.15.00 Lac for financing
his working capital requirements.
You are the manager of a branch. When you ask him how
has he calculated his needs, he is not able to give
satisfactory reply. He simply says that some how he feels
that his requirement will not be less than this amount.
He is, however, prepared to supply any information you
require assessing his needs.
 Case Study on
Working Capital Assessment
The following conversation takes place between you and
Mr. Mehedi Hasasn for collecting data for calculation of
his working capital requirement.
You : How many bicycles will you be able to produce
during the next year?
Hasan : 1200 units
You : What could be your selling price?
Hasan : Tk.9,000/- per bicycle.
You : Will you import raw materials directly?
Hasan : No, locally available imported raw materials will
be used.
 Case Study on
Working Capital Assessment
You : What will be the cost of raw materials & stores,
etc. used per bicycle?
Hasan : Tk.4500/-
You : How much will you have to pay for the labor
and other assembling costs every month?
Hasan : Tk.20,000/- per month.
You : What will be your non-assembling overheads
like transportation, rent, admin, marketing,
advertising expenses etc.?
Hasan : Tk.40,000/- (lump sum) for transportation, rent,
postage, etc.
 Case Study on
Working Capital Assessment
You : How many days stock of raw materials and
stores you will like to carry with you always?
Hasan : 60 Days.
You : How many days will it take for a raw materials
to be processed and converted into bicycle (i.e.
finished goods)?
Hasan : 6 Days.
You : How many days stock of finished goods will
remain in godown?
Hasan : 30 Days.
 Case Study on
Working Capital Assessment
You : Do you pay any advance to the suppliers?
Hasan : No.
You : Do you receive any advance from the buyers?
Hasan : No.
The conversation ends at this stage.
On being asked, Mr. Mehedi Hassan gives you the following
further information:
Customers will be granted two months credit after delivery
Purchases will be paid 30 days after receipt of the goods.
Average credit sales will be 50% of total sales.
Average cash balance and value of other trade stock is of
Tk.30,000/-
 Case Study on
Working Capital Assessment
Working:
1. Consumption of Raw Materials = 4500 X 1200
= 54,00,000/-
2. Assembling Cost (Per Year) = 20,000 X 12
= 2,40,000/-
3. Store Spares (Per Year) = 30,000/-
4. Total Assembling Cost = (54,00,000 + 2,40,000
+ 30,000)
= 56,70,000/-
 Case Study on
Working Capital Assessment

Assumption of Tied up period:

1. Procurement of Raw Material 60 days
2. Work in process (WIP) 06 days
3. Finished Goods 30 days
4. Receivables 60 days
5. Credit Purchase 30 days
6. Stores & Spares 60 days
 Case Study on
Working Capital Assessment
Working Capital Assessment:
Inventory Tied up Requirement
1. Raw Material 60 days 54,00,000
X 60 = 9,00,000
360
2. Work in process (WIP) 06 days 56,70,000
X 6 = 94,500
360
3. Finished Goods 30 days 56,70,000
X 30 = 4,79,500
360
4. Receivables 60 days 56,70,000/2
X 60 = 4,72,500
360
5. Stores & Spares 60 days 30,000
360 X 60 = 5,000

Sub Total Tk.1951,000/-

 Case Study on
Working Capital Assessment
Working Capital Assessment:
Inventory Tied up Requirement
Sub Total Tk.19,51,500/-
Less: Credit Purchase 30 days 54,00,000
360 X 30 = 4,50,000

Sub Total Tk.15,01,500/-

Less: Client’s contribution 20% of Tk.3,90,300/-
Tk.19,51,500/-
Maximum Allowable Investment Tk.11,11,200/-
Question?
Thank You