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 & Nonpeak 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 noncorporate 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
SSI
SBF
Trade
& Services
C&I
Industrial
LIMITS (Rs. Cr)
SUGGESTED METHOD
Upto 5
Traditional & Nayak Committee (PAT)
Above 5
Project Balance Sheet
All loans
Traditional & Nayak Committee (PAT)
Upto 1
Traditional & Nayak Committee (PAT)
Above 1
upto 5
Projected Balance Sheet &
Nayak Committee (PAT)
Above 5
Projected Balance Sheet
Below 0.25
Traditional & Nayak Committee (PAT)
Above 0.25 &
over upto 5
Projected Balance Sheet &
Nayak Committee (PAT)
Above 5
Projected Balance Sheet
State Bank of India
OPERATING CYCLE
30
Days
Cash
60
Days
Bills
Receivable
20
Days
OPERATING
CYCLE
Finished
Goods
Raw
Material
Stock in
Process
10
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
Monthly sales = 100
Cost of Raw Material per month = 80
Item
Stocking
period
(Rs. In lacs)
Cost of Production P.M. = 90
WC
required
Margin
(%)
Amt
Permissible
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
10
-
Total
Less: Advance Payment
Credit on purchase
Working Capital
Required
270
100
190
15
10
245
Liquid surplus in BS at the end of last year = 40
Limit from Bank = 190
Net Deficit = 245 – 40 = 205
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.
2.
3.
4.
5.
6.
7.
8.
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)
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
Year
A
Total CA
B
Other CL
C
Working Capital Gap
D
Net Working Capital (Actual / Projected)
E
Assessed Ban Finance (ABF)
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)
(A - B)
(C - D)
Current
Year
Next
Year
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
State Bank
10
11 of India
12
Month
1
2
3
4
5
6
7
8
9
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
-32
-5
24
58
17
-25
-41
-26
-30
10
4
-50
10
-22
-27
-3
55
72
47
6
-20
-50
-40
-36
-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/
Deficit
-32
-37
-13
45
62
37
-4
-30
-60
-50
-46
-96
Surplus/Deficit
BF Cash
Cum. Cash
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.
B.
C.
D.
E.
F.
G.
H.
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
State Bank of India
Projected Annual Turnover Method
COMPUTATION
A.
B.
C.
D.
E.
F.
G.
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
1200
1200
300
60
20
240
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
3
4
5
6
7
Out of (1) on credit basis
Out of (2) on usance LC basis
Average of (3) per month
Lead time (no. of months)
Usance period (no. of months)
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 /
Payment
period
WC
required
Margin
(%)
Raw Material
1m
25
Work in process
2w
25
Finished Goods
2w
25
Receivable
1m
33
Expenses
1m
100
Amt
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
Permissible
Limit
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 /
Payment
period
WC
required
Margin
(%)
Amt
Permissible
Limit
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
Less: Advance Payment
389
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