WORKING CAPITAL FINANCE IN FOOD PROCESSING INDUSTRIES.docx

7/24/2019 WORKING CAPITAL FINANCE IN FOOD PROCESSING INDUSTRIES.docx

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WORKING CAPITAL FINANCE IN FOOD PROCESSING INDUSTRIES

Before explaining te !or"ing #apital finan#e in Foo$ Pro#e%%ing In$&%trie%' !e are

ere !it (riefl) explaine$ te #on#ept an$ *eto$% of !or"ing #apital finan#e

a$opte$ () In$ian Ban"% +

A+ CONCEPT OF WORKING CAPITAL FINANCE,

1. Working capital means the sum total of funds required for continuous

operation of a business / manufacturing unit on an ongoing basis. It

represents the funds invested in an enterprise to keep its operations

moving without any stoppage or dislocation.

2. An industrial concern has to procure raw materials for processing pay

for energy / power / fuel pay wages and other manufacturing e!penses

store "nished goods before marketing and grant credit to its customers.

#ikewise a business / trading concern needs "nance for stocking goods

paying wages overheads etc. and providing credit to its customers.

$imilarly a concern engaged in providing services needs "nance to pay

wages overheads etc. and provide credit facility to its customers. %he

amount required to fund the day to day operations is called working

capital.

B. OPERATING CYCLE [WORKING CAPITAL CYCLE):

It may be observed that the day&to&day operations of an enterprise

constitute a cycle' the cycle begins with conversion of cash in to raw


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material (purchase of raw material for cash) payment for labour power /

energy by which raw material is converted / processed into "nished

product storage and distribution of the "nished product for sale and ends

up with cash realisation from sales thus making the cycle complete. %his

cycle commencing with conversion of cash into raw material and ending

up with reali*ation of cash from sale of the "nished product is called

+perating ,ycle. %he operating cycle may also have additional phases

mainly due to the entry of credit dealings in addition to cash dealings &

purchase of raw materials / goods on credit sale of goods / "nished

products on credit reali*ation of cash from credit sales payment for credit

purchase of goods / raw materials etc.

The Operating Cyce !" a #an$"act$ring enterpri%e c!n%i%t% !" the "!!&ing

%tage%' pha%e%:

(i) ,onversion of cash in to raw materials & raw materials may be procured

on either payment of cash or on credit. If procured on credit cash has to

be paid after some time. #ikewise manpower fuel / energy have to be

procured for the purpose.

(ii) ,onversion of raw materials into stock in process' stock in process into

"nished products.

(iii) ,onversion of "nished products into cash or receivables / debtors.

(iv) ,onversion of receivables / debtors into cash & leading to stage (i) of the

cycle all over again to start a new operating cycle.

In the ca%e !" a tra(ing c!ncern the !perating cyce c!n%i%t% !" the "!!&ing

%tage%:

(i) ,onversion of cash in to goods / products for sale. (-oods / products may

be procured on either payment of cash or on credit. If procured on credit

cash has to be paid after some time. #ikewise manpower etc. has to be

procured for the purpose.)

(ii) ,onversion of goods / products into cash or receivables / debtors ($ale on

,ash / ,redit).

(iii) ,onversion of receivables / debtors into cash & leading to stage (i) of the

cycle all over again to start a new operating cycle.


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rom the above we come to know that Working ,apital represents the

funds / "nance required to keep the operating cycle of an enterprise

moving without any stoppages. If the business has to run continuously

there should be a continuous ow of su0cient liquid cash to pay for the

various items in the dierent stages of the operating cycle. In the above

two stages the +perating ,ycle of a manufacturing enterprise and a

trading concern3 we have seen how the operating cycle repeats itself. 4ut

if one has to depend on only the cash generated from a cycle for the

occurrence of the ne!t cycle there will be interrupted production. %he

entrepreneur is interested in turning out a continuous ow of goods /

"nished products which only could generate enough cash to keep the

business in good health. %his requires continuous infusion of certain

amount of liquid cash and the locking up of a certain amount of funds in

the dierent stages of the operating cycle.

C+ CLASSIFICATION OF WORKING CAPITAL,

Working ,apital can be classi"ed as &

(a)5ermanent Working ,apital which is the minimum amount of investmentin current assets necessary for carrying out operations for a given

period.'

(b) luctuating Working ,apital which is additional working capital required

at dierent times in the operating cycle due to cyclical uctuations'

(c)$easonal Working ,apital which is the requirement of additional current

assets due to seasonal nature of the industry.

D. WORKING CAPITAL ASSESSMENT FOR BANK FINANCE:

1. 5roper assessment of working capital requirements and computation of

ma!imum permissible bank "nance are based on the norms for holding

current assets and proper classi"cation of current assets and liabilities.

2. 6orms for holding ,urrent Assets (Inventories and 7eceivables)8 4ank

credit for working capital requirements is linked with production

requirements. As such the working capital requirement is assessed bydeciding on the reasonable level of holding current assets required for


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production. %his depends on the rate of ow of e!penditure or costs within

the operating cycle and the length of the operating cycle.

i3 %he rate of ow of e!penditure or costs within the operating cycle in

turn depends on the volume of production and sales and the costs

associated with such production or sales each of which in turn is

inuenced by several factors such as (a) 6ature of business (b) $i*e of

business (c) 5roduction process (d) $tock turnover velocity

(e) ,redit terms in the industry (f) %rade credits available(g) 9nit cost of

the product (h) $easonal uctuations and (i) 4usiness cycle uctuations.

-ii) The length of the oe!"ting #$#le fo! "n$ %&'ine''( gene!"ll$( #on'i't' of

the folloing h"'e':

a. %he period for which the raw materials are held in stock (pre&production

phase)b. %he length of the production cycle (production phase)c. %he period for which "nished goods are held in stock (storage phase)d. %he collection period in respect of sales receivables. (collection phase)

iii3 %he length of the operating cycle of a business is the sum of the lengths

of the above phases of the cycle. or the purpose of assessment of working

capital requirements and determining the level of current assets in respect

of a borrower where no norms are prescribed in this regard it is necessaryto compute the length of the above mentioned dierent phases of the

operating cycle as under8

*") 5re&production 5hase8 $tock of raw materials : ; 5rocess: ;


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+. 5roper ,lassi"cation of arious Items of ,urrent Assets and ,urrent

#iabilities8 In order to calculate net working capital and ma!imum

permissible bank "nance it is necessary to have proper classi"cation of

various items of current assets and current liabilities.

,. Working ,apital -ap8 After estimating the reasonable level of current

assets (inventory receivables etc.) required for the operation of a unit

sources of "nancing the same are decided. A part of the total current assets

can be "nanced by creditors for purchases and other current liabilities. %he

remaining part of the current assets is called the working capital gap. It is

the borrowerBs requirement of "nance to carry current assets other than

those "nanced out of current liabilities. Working ,apital gap is thus current

assets minus current liabilities other than bank borrowings. %his gap can be

partly "nanced by borrowerBs own sources / long term borrowings and

partly by bank "nance.

.+ Wor"ing Capital A%%e%%*ent for $ifferent #ategor) of (orro!er%,

*eth!( !" A%%e%%#ent B!rr!&er Categ!ry'

Ec!n!#ic Acti+ity

W!r,ing Capita Re-$ire#ent

PT* Pr!ecte( T$rn!+er

*eth!( (as enunciated by

Nayak Committee)

B!rr!&er% in industry,tradeand

service segments, Software industry.

Fund based workingcapital limits

up to Rs. Crores from t!e "anking

system (Rs. # Crores in t!e case of SS$

units).

PB/ Per#i%%i0e Ban, /inance

#eth!( (modified version of

%&"F met!od

"orrowers in $ndustry, trade and

service segments Civil

Contractors ' "uilders 'borrowers engaged in

construction activities

Fundbased workingcapital limits

above Rs. Crores (above Rs.# Crores

in t!e case of SS$ units) irrespective

of sie of t!e credit limit &"F or C"%

NOTE: "orrowers !aving Fundbased working capital limits above Rs.*+ Crores from t!e "anking system

will !ave an option to go in for Cas! "udget %et!od) .

Ca%h B$(get *eth!( [CB*1

(as prescribed by annan

Commit tee wit! modifications to

suit industryspecific needs

"orrowers in industry,

-rade and service segments Civil

contractors'builders borrowers engaged in

construction activities.

ptional for borrowers !aving

Fundbased working capital

limits above Rs.*+ Crores from

t!e "anking system irrespective

of t!e sie of t!e credit limit &"For C"%

No( e ill %!ie-$ i'#&'' the i/e!ent 0etho' of o!1ing #"it"l 2n"n#e "' &ne!:


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A. PRO3ECTED T4RNO5ER MET6OD :

Applicability8 %his method of assessment should be applicable to all

borrowers who are engaged in manufacturing services and trading

activities (including merchant e!porters) with fund based working capital

requirements up to and inclusive of 7s 2 cores from the banking system( 7s.= cores in the case of $$I units ).

Co0&t"tion of o!1ing #"it"l 2n"n#e:

-ross Working ,apital (-W,) requirements are assessed at a minimum

2= per cent of the annual proCected turnover. +f the -ross Working

,apital so assessed at least 2D percent shall be brought in by the

borrowers as margin by way of long term sources and the remaining ED

percent will be provided by the 4ank by way of working capital "nance.

%he formula will be8

[Rs. in lakhs]

%he above guidelines have been framed assuming an average production/

processing cycle of three months.

B. PERMISSIBLE BANK FINANCE 7PBF8 MET6OD

Ali#"%ilit$:%he 54 method of assessment should be made applicable to

all borrowers who are engaged in manufacturing services and trading

activities (including merchant e!porters) with fund&based working capital

requirements of above 7s. 2 crores from the banking system (above 7s.=

crores in the case of $$I units).

%he 54 Fethod will also be applicable to civil

contractors/builders/borrowers engaged in construction activities

irrespective of amount of fund&based working capital requirements from

the banking system. %he above category of borrowers with fund&based

working capital limits above 7s 1D crores from the banking system should

be given an option to adopt the proposed ,ash 4udget Fethod.

* &ro/ected -urnover for t!e year

0ross 1orking Capital 201C3

2#4 of t!e pro/ected turnover3

5 6ess 7 "orrower8s %argin 29 %inimum of +4 of 01C or

pro/ected N1C w!ic!ever is !ig!er 3

: &ermissible "ank Finance 253


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Co0&t"tion of o!1ing #"it"l 2n"n#e:

Rs. in lakhs

9ssessment 5*.+5.+*5

9udited

5*.+5.+*:

9udited

5*.+5.+*#

9udited

5*.+5.+*;


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September *,#+,+++ ,++,+++ #+,+++

ctober :+,+++ #+,+++ *+,+++

November B+,+++ B+,+++ +

=ecember ,++,+++ ,*+,+++ *+,+++

Aanuary *,;+,+++ *,@#,+++ 5#,+++

February *,:+,+++ *,B+,+++ :+,+++%arc! *,@+,+++ ,+,+++ 5+,+++

Eigi0iity "!r Ban, /inance 56666

5lease ensure that the estimated cash ow statement is prepared in

line with past trend. %he concept of working capital "nance and dierent

method of working capital inance is briey e!plained above. 6ow we willassessed the working capital requirement of a @alt processing ood >

5rocessing Industries3 Industries collected from a 4ank.

F/s $uraC Industries 5vt. #td is a private limited company is engaged in

processing of @all since last ten years. %he "nancial position of the

company since last ; years Audited3 and estimated and proCected "nancial

for the year ending ;1.D;.2D1< and ;1.D;.2D1G is furnished as under for

the purpose to determine the working capital requirement8

23RA7 IN832TRIE2 P5T.LTD

P!o2t "n lo'' "##o&nt fo! the $e"! ene +9.:+.;:9< "n e%ti#ate('pr!ecte( !o2t "n lo''

"##o&nt

of the #o0"n$ fo! the $e"! ening +9.:+.;:9= "n +9.+:+.;:9>

Rs. in croreD

9;69;


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port $ncentives

=uty =rawback

t!ers

-otal perating $ncome #5.;5 *5*.5+ *B5.B* *B#.++ *@+.++

perating penses

Raw materials consumed $mported

Raw.materials consumed $ndigenous :?.:: **B.*: *;B.5B *?B.5B *B5.:;

t!er Spares consumed $mported

t!er Spares consumed $ndigenous

&ower and fuel

=irect labour and wages

t!er manufacturing e>penses .5@ :.#@ ?.5: ?.* *.

=epreciation +.*+ +.+@ +.5: +.5 +.+

Sub -otal (9) :@.@5 *.B *?;.+; *B#.B *B:.BB

9dd7 p. Stock of 1$&

6ess7 Cl. Stock of 1$&

-otal Cost of &roduction :@.@5 *.B *?;.+; *B#.B *B:.BB

pening Stock of F0 *+.?? *+.*; #.B* *.?? B.++

6ess7 Cl. Stock of F0 *+.*; #.B* *.?? B.++ B.#+

Sub -otal (")

-otal Cost of Sales #+.#: *?.*? *B+.*+ *?@.#@ *B:.5B

Selling, 0en. E 9dministration p *.5+ *.B; *.B .; .?#

Cost of Sales S09 #*.B: *@.+5 *B*.@ *B.* *B?.*5

perating &rofit before $nterest *.?@ .? *.B@ .?@ .B?

$nterest *.# *.@B . .:+ .:#

perating &rofit after $nterest +.? +.@ +.55 +.5@ +.:

Non operating income

t!er Non perating $ncome +.+: +.#:

-otal nonoperating $ncome +.+: +.#:

Non operating e>penses

6oss on sale of assets

&rem. penses w'off

t!er Non operating e>p.

-otal Nonoperating e>penses

Net of Nonoperating $ncome ' penses +.+: +.#:

&rofit "efore ta> +.? +.55 +.* +.5@ +.:&rovision for ta>ation7 Current

&rovision for ta>ation7 =eferred

Sub -otal7 &rovision for ta>ation


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Net &rofit 9fter ta> +.? +.55 +.* +.5@ +.:

traordinary items

9d &9- (e>cl traordinary ' &rior Gear $tems) +.? +.55 +.* +.5@ +.:

=ividend

Retained &rofit +.? +.55 +.* +.5@ +.:

Cas! 9ccruals +.5? +.: +.## +.; +.;

Baance %heet a% !n 9.69.


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t!er $nvestments

Receivables t!er t!an =effered E e>ports (=omestic #.5; *.B+ :.#B ?.;+ ?.B*

port Receivables

=eferred receivable (due upto *B+ days.)

Raw %aterials $mported

Raw %aterials $ndigenous

1ork in process

Finis!ed 0oods (incl -raded 0oods) *+.*B ;.* .: B.++ B.#+

t!er consumable spares $mported

t!er consumable spares $ndigenous

Sub total ($nventory) *+.*B ;.* .: B.++ B.#+

9dvances to suppliers

9dvance payment of ta> +.+# +.+; +.*+

t!er Current 9ssets *.++ +.+# +.+? +.*+ +.*

T!ta C$rrent A%%et%


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*.-!e company !as ac!ieved total sales turnover of Rs.*B5.B* crore for t!e

year ended 5*+5+*# as against t!e sales turnover of Rs.*5*.5+ crore for t!e year

ended 5*.+5.+*: s!owing a positive growt! of 5@.@@4 over t!e previous year.

. -!e company !ad pro/ected a salesof Rs. *B#.++ crore for t!e year ended 5*

+5+*# as against t!is t!e firm !as ac!ieved total sales turnover of Rs.*B5.B* crore

s!owing @@ 4( appro>) ac!ievement over t!e estimated figure.

5. -!e company !as estimated total sales turnover of Rs.*B#.++ crore for t!e year

ending 5*.+5.+*; and pro/ected Rs.*@+.++ crore for t!e year ending 5*.+5.+*?

envisaging +.;#4 and .?+4 increase over +*# and +*; respectively. $n t!is

connection, it is reported t!at t!e company !as ac!ieved total sales turnover of

Rs.@+.++ crore for t!e five mont!s # days endedd #.+@+*# and on annualied

basis it works out to appro>imately Rs. *BB.++ crore. -!erefore, we !ave accepted

t!e estimated turnover of Rs.*B#.++ crore submitted by t!e company. "ased on t!e

audited and estimated financial submitted by t!e company t!e !olding level are arrived

as under7

@!(ing e+e: (Rs.in crore)

@!(ing Le+e% 9.69.


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A%%e%%#ent 9.69.

WORKING CAPITAL FINANCE IN FOOD PROCESSING INDUSTRIES.docx

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