WORKING CAPITAL APPRAISAL

• 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 APPRAISAL

• 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)
 WORKING CAPITAL APPRAISAL
• 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 APPRAISAL

• 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
 WORKING CAPITAL APPRAISAL
• DELAY IN COLLECTION OF DATA
• Renewal possible:

• Ad-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

• 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 Methods:
? Operating Cycle Method
? Traditional method
? Projected Balance Sheet method
? Cash Budget method
? Projected Annual Turnover method (Nayak Committee)
 WORKING CAPITAL APPRAISAL

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 APPRAISAL
• 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 APPRAISAL
• 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 appraisal

• 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
 WORKING CAPITAL APPRAISAL
• Traditional Method ( UNIT In lacs)

• Unit: ABC Ltd Monthly sales = 100 Cost of Production P.M. = 90 Cost of Raw Material per month = 80

Item Stocking WC required Margin Amt Permissible

period (%) 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 15
Payment
Credit on 10
purchase
Working capital 245
required

Liquid surplus in BS at the end of last year = 40 Net Deficit = 245 – 40 = 205
Limit from Bank = 190
 WORKING CAPITAL
• 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
Obtain Data on CMA (separate projections for Peak / Non-peak)

Validate Current Liabilities ?

Validate Current Assets ?

 WORKING CAPITAL
• 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)
 WORKING CAPITAL
• 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)
 WORKING CAPITAL
• 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
 WORKING CAPITAL
• 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 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)
 WORKING CAPITAL
• 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 540 720 360 360 100 180 300 360 360 240 240 450
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
 WORKING CAPITAL
• Projected Turnover Method (Nayak Committee)
• Up to FBWC Limit of Rs. 5 crores – MSME
• WC Requirement = 25% of realistic Projected Annual
Turnover
• (min. 5% of turnover to be brought by borrowers as their
contribution)
• 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
 WORKING CAPITAL

• 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
 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
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
 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