13 WCM assessment.pptx

7/21/2019 13 WCM assessment.pptx

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Working Capital Sources

Own funds

Bank borrowings

Sundry CreditorsAdvances from customers

Deposits due in a year

Other current liabilities


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Working Capital Finance by Banks

Fund Based Cash Credit

Bills Purchased

Non Fund Based Letter of Credit

Bank Guarantee/ Bankers Acceptance


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Working Capital Limit

Generally for 12 months, or Seasonal industry

Short duration

Peak & Non-peak level, or

Subject to specific repayment schedule,

Renewal necessary (within 180 days to avoid becoming

NPA)


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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)


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WORKING CAPITAL

WC Assessment is based on

Volume of activityProduction & Sales

Required level of current assets (Inventory &Receivables) to enable the unit to carry onoperations without interruptions


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Audited Financial Statements for 2

years

Break up of various items

Projected Balance Sheet and P&LA/c

Funds Flow Statement

Documents Required


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Banks analyse documents for:Production facilitiesMarketing

Expansion Plan

Industrial RelationsProspects of the Industry

Management set-up

Major shareholders etc.

Assumptions & assessment of CreditRequirement

WORKING CAPITAL LIMIT


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QUANTUM AND ASSESSMENT METHOD

SEGMENT LIMITS (Rs. Cr) SUGGESTED METHOD

SSIUpto 5 Traditional & Nayak Committee

Above 5 Project Balance Sheet

SBF All loans Traditional & Nayak Committee

Trade

& Services

Upto 1 Traditional & Nayak Committee

Above 1

upto 5

Projected Balance Sheet &

Nayak Committee

Above 5 Projected Balance Sheet

C & I

Industrial

Below 0.25 Traditional & Nayak Committee

Above 0.25 &

over upto 5

Projected Balance Sheet &

Nayak Committee

Above 5 Projected Balance Sheet


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OPERATING CYCLE


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

i.e. 3 Cycles in a year (365 / 120)

OPERATINGCYCLE

Raw

Material

Stock inProcess

Finished

Goods

Bills

Receivable

Cash

60

Days

10Days

20Days

30Days


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OPERATING CYCLE: PERMISSIBLE BANK

FINANCE


Operating cycle is 120 day (4 months) or 3 cycles in a

yearSales (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 operat ing expenses or Level of

Operat ions.

(b) Length of operat ing cyc le.

Reduction in either will bring down WC

requirement.


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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 ofSales)

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)


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Traditional Method

Item Stockingperiod

WCrequired

Margin(%)

Amt PermissibleLimit

Raw Material 1 m 80 20 16 64

Work in process 2 w 45 33 15 30

Finished Goods 2 w 45 20 09 36Receivable 1 m 90 (100)40 40 60

Expenses 1 m 10 100 10 -

Total 270 190

Less: Advance Payment 15Credit on purchase 10

Working CapitalRequired

245

Unit: ABC Ltd (Rs. In lacs )Monthly sales = 100 Cost of Production P.M. = 90Cost of Raw Material per month = 80

Liquid surplus in BS at the end of last year = 40

Limit from Bank = 190

Net Deficit = 24540 = 205


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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

t t


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ro ecte a ance eetMethod

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

Validate Current Liabilities

Validate Current Assets
http://localhost/var/www/apps/conversion/tmp/scratch_9/cma_data.xlsmhttp://localhost/var/www/apps/conversion/tmp/scratch_9/cma_data.xlsm


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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. Instalment of term loans / debentures /redeemable preference shares (falling due innext 12 months)

9. Statutory liabilities

10. Misc. Current Liabilities - Dividends & othera ments fallin due in next 12 months


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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 oneyear

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)


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Levels of Inventory, Receivables & Sundry Creditors

Trends

Inter-firm comparison

Industry Levels

Borrowers specific strengths & weaknesses

Suggested levels of inventory & receivables Production PolicyConstant/seasonal


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Validation of Raw Material Holding

Average consumption / holding

Sourcelocal / outside / abroad

Time taken

Minimum order quantity

Cost of holding

Criticality

Transport Cost

Credit available

Seasonality


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Validation of SIP Holding

Processing time Processing technology

No. of shifts


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Validation of Finished Goods Holding

Firm order or anticipated order

Minimum despatch quantity

Transport availability / cost

Seasonality Marketing arrangement


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Receivables

Trade practices

Market conditions

Bulk sales - benefits

Price advantage Seasonality (vis. rain coats, woollen

garments)


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ASSESSED BANK FINANCE METHODPrevious

YearCurrent

YearNextYear

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)


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Evaluation of Liquidity

Benchmark current ratio is 1.33Depends 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.


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Bills Purchased Under L/C

L/C From Approved Bank

(Outside The Approved Bank

Finance)

L/C From Not Approved Bank

(Within The Approved Bank Finance)


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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


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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 -36Cum. 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

Cumulative

Surplus/Deficit

-32 -37 -13 45 62 37 -4 -30 -60 -50 -46 -96


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Projected Turnover Method (Nayak Committee)

Fund Based WC Limit of up to Rs. 5 croresSMEWC Requirement = 25% of realistic Projected Annual

Turnover

(minimum 5% of turnover to be brought by borrowers as

their contribution)


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TURNOVER METHOD

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 DG. Item C - item E

H. Min. WC Finance - F or G, whichever is

less

COMPUTATION


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Projected Annual Turnover Method

A. Annual Turnover as projected by Borrower

1200

B. Turnover as accepted by Bank

1200C. Working Capital Requirement (25% of B)

300

D. Minimum margin required (5% of B)

60E. Actual Margin available (CA - CL)

20

F. Item C - item D

240

COMPUTATION


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LC AssessmentFLC ILC

1 Annual purchase/import

2 Out of (1) on credit basis3 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)


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TRADITIONAL METHOD

Item Stocking /Payment

period

WCrequired

Margin(%)


Raw Material 1 m 25

Work in process 2 w 25Finished Goods 2 w 25

Receivable 1 m 33

Expenses 1 m 100

Total

Less: Advance Payment

Credit on purchase

Working Capital Required

Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000s)

Anticipated monthly sales = 200 Cost of Production per month =190

Cost of Raw Material per month = 150 Advance Payments from Customers 30


Pl work out Cash Credit Limit from Bank

Net Deficit


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TRADITIONAL METHOD

Item Stocking /Payment

period

WCrequired

Margin(%)


Raw Material 1 m 150 25 37 113

Work in process 2 w 95 25 24 71Finished Goods 2 w 95 25 24 71

Receivable 1 m 190 33 66 134

Expenses 1 m 40 100 40 00

Total 570 389

Less: Advance Payment 30

Credit on purchase 80

Working Capital Required 460

Name of the Unit: ABC Ltd Credit on purchases = 80 (Rs. In 000s)

Anticipated monthly sales = 200 Cost of Production per month = 190

Cost of Raw Material per month = 150 Advance Payments from Customers= 30


Cash Credit Limit from Bank = 390Net Deficit 460 - 50 = 410

R i t f WC


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Requirement of WCAkshat and Company has prepared its annual budget with following details:

1. Sales Rs. 46.80 lakh (25% cash sales and balance on credit) : 78,000 units

2. Raw Material Cost : 60% of sales value3. Labor Cost : Rs. 6 per unit

4. Variable Overheads : Rs. 1 per unit

5. Fixed Overheads : Rs. 500000

(including

Rs.1,10,000 as depreciation)

6. Budgeted Stock Levels:

Raw Materials : 3 weeksWork-in-Progress : I week (material 100%; laour

and overheads 50%)

Finished goods : 2 weeks

7.` Debtors are allowed credit : 4 weeks

8. Credits allowed : 4 weeks credit

9. Lag in payment of overheads : 2 weeks

10. Cash in hand required : Rs. 50,000

11. Wages are paid as follows:

(a) For 1stand 2ndweek: in the 3rdweek

(b) For 3rdand 4thweek: in the next week

Prepare working capital requirement for a year for the company.

(Assume one year = 52 weeks)

Unit Selling Price and Cost:


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g

Selling Price Rs. 60

Raw Materials 36

(60% of Rs. 60)

Labor 6

Variable Overheads 1

Fixed Overheads (3,90,000/78,000) 5 (Excluding depreciation)Total 48

Statement of working capital Requirement

A. Current Assets

Raw Materials (3X 1500X36) 1,62,000

Work-in-Progress (1X1500X42) 63,000

Finished Goods (2X1500X48) 1,44,000

Debtors (4500X60) 2,70,000

Cash in hand 50,000

Total current Assets 6,89,000

B. Current Liabilities

Creditors (4X 1500X36) 2,16,000

Lag in wages (2X1500X Rs.6) 18,000

Lag in payment of Overheads (2X1500X Rs.6) 18,000

Total current Liabilities 2,52,000

Net Working Capital Required (CA-CL) 4,37,000


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Notes:

1. Total sales for 4 weeks are 6,000 units. Excluding 25% cash sales,

credit sales amounts to 4500 units.

2. 1 year is assumes to be 52 weeks and weekly sales is78,000/52=1500 units.

3. Work in progress is valued at Rs.42 (i.e. 36+3+3)

4. Total overhead per unit is Rs.(1+5). As, no fund is required for

depreciation, this has been deducted from total fixed cost.

5. Some candidates may calculate the debtors at selling price and inthat case, the debtors would be Rs,2,70,000 and workiong capital

would be Rs.4,37,000.

13 WCM assessment.pptx

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