WORKING CAPITAL ASSESSMENT

R.KANCHANAMALA
FACULTY MEMBER
IIBF

INDIAN INSTITUTE OF BANKING & FINANCE

WHAT IS WORKING CAPITAL
METHODS OF WC ASSESSMENT
WHY WORKING CAPITAL

COMPONENTS OF MPBF Method

WORKING CAPITAL
Projected Annual Turnover
Method
CASH BUDGET METHOD

Operating Cycle Method

Traditional
INDIAN INSTITUTE OF BANKING & FINANCE Method
Funds required to acquire
current assets to enable
business/industry to
operate at the expected
levels.
INDIAN INSTITUTE OF BANKING & FINANCE
 Own funds
Other
current Bank
liabilities borrowings

Working
borrowings

Deposits
from capital Advances
from
customers
public
Market Sundry
borrowing Creditors

INDIAN INSTITUTE OF BANKING & FINANCE

Working capital is a Measure Of Company’s Efficiency And Short-term
Financial Health

Working Capital
Gap(WCG)
Gross working Net working capital
capital (Liquid surplus)
Total Current
Assets - Other
Total investment Current Current assets –
in current assets Liabilities Current liabilities
(Excl. Bank
Borrowings)
INDIAN INSTITUTE OF BANKING & FINANCE
 Net worth FIXED ASSETS
100 LTU
105
LTS Long Term Liabilities 50
NON CURRENT ASSETS
---------------------------- 15

----- NWC
SHORT TERM BANK
BORROWINGS 30
------------------------------------------ CURRENT ASSETS

-------- CURRENT LIABILITIES 110 STU

STS
OTHER CURRENT
LIABILITIES 50
INDIAN INSTITUTE OF BANKING & FINANCE
An operating cycle is the
Time between acquisition of assets for
processing and their realization in cash or cash
equivalents .
Lower the period indicates more rotation of
working capital and vice versa.
The working capital cycle helps in determining
the realistic working capital requirement of
entity
WORKING CAPITAL ASSESSMENT
INDIAN INSTITUTE OF BANKING & FINANCE
 30 Cash
Days 30
Days
Bills Raw
Receivable Material
OPERATING
CYCLE

20 Finished Stock in
Goods Process 10
Days
Days
Length of Operating Cycle = 30+10+20+30 = 90 days
i.e. 4 Cycles in a year (365 / 90)
WORKING CAPITAL ASSESSMENT
INDIAN INSTITUTE OF BANKING & FINANCE
Assets which normally get converted into cash during the operating cycle of the entity

 Cash & Bank Balances

 Stocks of goods or raw materials, goods-under process, finished goods
and book debts.
 Advance paid to suppliers
 Installments of deferred receivables
 Advance tax paid
 Cash margins for L/Cs and guarantees and cash/term deposit with banks
as margin for L/Cs and guarantees relating to working capital facilities
 consumable spares
 Pre Paid Expenses etc.

INDIAN INSTITUTE OF BANKING & FINANCE

The liabilities, which are to paid within a period of one year
/operating cycle
 Trade Payables/ Creditors (purchases for which payment is yet to be made)
 Creditors for expenses
 Cash Credit/ Overdraft from banks
 Other short term loans
 Debt balance in current/ saving accounts
 Income received in advance
 Duties and taxes payable
 Expenses payable
 Provision for Income Tax
 Interest accrued but not due on borrowings
 Unpaid dividend
 Unpaid matured deposits
 Share application money, which is to be refunded
 Current Maturities of longINDIAN
term debts
INSTITUTE OF BANKING & FINANCE
 IMPROPER
IMPACT
CLASSIFICATION
Lower Working
CURRENT ASSET As NON-CURRENT Capital

NON-CURRENT LIABILITY As CURRENT Lower Current Ratio

NON CURRENT ASSETS As CURRENT Higher Working

Capital
CURRENT LIABILITY As NON-CURRENT
Higher
INDIAN INSTITUTE OF BANKING Current Ratio
& FINANCE
 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)
 Length of Operating Cycle

INDIAN INSTITUTE OF BANKING & FINANCE

 Application.
 Financial Statements of Previous years
 Estimates/ Projections (with quantitative
details)

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CMA FORMATS
1. FORM I – TOTAL INDEBTEDNESS OF THE
BORROWER
2. FORM II - OPRATING STATEMENT
3. FORM III- ANALYSIS OF BALANCE SHEET
4. FORM IV – COMPARATIVE POSITION OF CAs and
CLs
5. FORM V – COMPUTATION OF MPBF
6. FORM VI – FUND FLOW STATEMENT
INDIAN INSTITUTE OF BANKING & FINANCE
The next year’s sales projections made by the borrower, however, would have to be
corroborated by the trend in sales over 2 years, last year actual sales through
verification of the following indicative parameters (besides the financial data submitted
by the borrower) :
 Sales Ledger/Sales Turnover.
 Credit Summation in the account
 Sales Memos or Invoices/Delivery Challans.
 GST RETURNS
 Electricity Bills –wherever applicable.
 Orders on hand/expected orders.
 Installed capacity vis-à-vis the projections.
 Overall market trend etc,
 Such projections should be within reasonable limits say 25% over last year’s
sales. However, in exceptional cases deviations from this may be allowed if
supported by LCs/Firm orders on hand etc,.
INDIAN INSTITUTE OF BANKING & FINANCE
 Holding level means the period of a particular current asset or
current liability after which it is converted or realized or is paid
Inventory Holding Levels
Raw Material holding level (in months) =
Average stock of Raw Material x 12
Raw Material Consumed
Stock in process holding period =
Average stock in process x 12
Cost of production
Finished Goods holding period =
Average stock of finished goods x 12
Cost of sales

INDIAN INSTITUTE OF BANKING & FINANCE

Receivables holding period (debt collection period) =
Average receivables (debtors) outstanding x 12
Gross sales

Creditor payment period=

Average creditors x 12
Purchases

INDIAN INSTITUTE OF BANKING & FINANCE

 METHODS OF
WORKING CAPITAL
ASSESSMENT

INDIAN INSTITUTE OF BANKING & FINANCE

 Methods of WC Assessment
MPBF METHOD All loans/ Usually above Rs. 5.00 cr)

PROJECTED
ANNUAL TURNOVER SSI / MSME loans upto Rs. 5.00
METHOD cr

CASH BUDGET (GAP

) METHOD Seasonal industries / construction
loans / adhoc limits etc.

TRADITIONAL ALL OTHER LOANS UPTO RS.

METHOD 25.00 LAKHS

OPERATING CYCLE
METHOD Very small loans usually upto Rs. 2.00
lakhs
INDIAN INSTITUTE OF BANKING & FINANCE
MPBF METHOD

INDIAN INSTITUTE OF BANKING & FINANCE

 MPBF Method -I
i. Total Current Assets( TCA)

II. Other Current Liabilities(OCL excl bank borrowings )

III. Working Capital Gap( WCG)= TCA-OCL

IV. Margin Requirement 25 % Of WCG

V. Net Working Capital( NWC)

VI. PBF (Permissible Bank Finance ) III- IV

VII PBF (Permissible Bank Finance ) III- V

VIII. MPBF VI Or VII Whichever Is Less

INDIAN INSTITUTE OF BANKING & FINANCE

 MPBF Method-II
i. Total Current Assets( TCA)

ii. Other Current Liabilities(OCL excl bank borrowings )

iii. working Capital Gap( WCG)= TCA-OCL

IV. Margin requirement 25 % of TCA

v. Actual Net working capital( NWC)

vi. PBF (Permissible Bank Finance ) III- IV

VII PBF (Permissible Bank Finance ) III- V

VIII. MPBF VI or VII whichever is less

INDIAN INSTITUTE OF BANKING & FINANCE

MPBF Method-III
I. Total Current Assets( TCA)
II. Less Core current assets ( CCA )
III. Less OCL
IV. Working capital Gap ( I-II-III )
V. Less Margin ( 25% of TCA-CCA)
VI. Bank limit (IV-V)
VII. Actual Borrowing
VIII. Excess borrowing VII-VI

INDIAN INSTITUTE OF BANKING & FINANCE

 ASSESSMENT OF MPBF FOR EXPORT UNITS
I. Total Current Assets( TCA) ( of which export receivables 40) 100

II. Other Current Liabilities(OCL ) 20

iii. working Capital Gap( WCG)= TCA-OCL 80

IV. 25 % of (TCA- Export receivables ) 15

v. Net working capital( NWC) 20

vi. PBF (Permissible Bank Finance ) III- IV 65

VII PBF (Permissible Bank Finance ) III- V 60

VIII. MPBF VI or VII whichever is less 60

INDIAN INSTITUTE OF BANKING & FINANCE
Tandon committee Recommendations
CA=1000 OCL 400 CCA 200
BB=475

INDIAN INSTITUTE OF BANKING & FINANCE

 )

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 Assessment as per Nayak Committee recommendations

 Minimum Working Capital requirement envisaged at 25% of projected

gross Sales Turnover.

 Applicable to borrowers with Fund based W/c limits up to and inclusive of Rs.5
Crores from the banking system.

INDIAN INSTITUTE OF BANKING & FINANCE

 ..
 Working Capital Requirement –
25% of projected gross Sales turnover
 Minimum margin required-
5% of projected Sales turnover
Bank loan requirement –
20% of projected sales turnover
 Assume average production / business cycle of 3
months.
 Drawings allowed on the basis of Drawing Power.

INDIAN INSTITUTE OF BANKING & FINANCE

General Guidelines:- For working capital limit requirements for MSEs upto Rs 5 crore, working
capital limits under Turnover Method to be assessed as under:-
Micro & Small Enterprises:-
a) Units with digital portion turnover of 25% & above in previous year:-
The projected turnover is to be further divided into two components i.e. Digital and
Non-Digital.
Working Capital Assessment to be carried out as under:-
i. For Non-Digital Portion:- Working Capital Limits- Minimum 25% of the accepted
projected turnover.
ii. For Digital Portion:- Working Capital Limits- 30% of the accepted projected
turnover.
 The percentage of digital transaction in projected turnover (accepted) to be taken as
actual percentage of digital portion in the previous year
 Digital transactions-All sales transactions reflected in the bank books other than cash
and paper based instruments may be considered
INDIAN INSTITUTE OF BANKING & FINANCE
 b) All Other MSEs:- Working Capital Limits- Minimum 25% of the accepted
projected turnover.
Borrower’s contribution by way of NWC to be 20% (1/5) of the working capital
requirement.
MEDIUM ENTERRPRISES : Working Capital Limits- Minimum 20% of the
accepted projected turnover.
Remarks:- To be guided by individual bank’s MSME Loan Policy

INDIAN INSTITUTE OF BANKING & FINANCE

 As on 31st March, 2022
Amount in lakhs
Liabilities Assets
Capital 40.00 Land 7.90
Reserve and 24.56 Building 7.86
surplus
Unsecured loan 4.00 Plant and 14.76
Machinery
Vehicle loan 5.30 Vehicles 11.00
Creditors for 87.00 Cash and bank 0.74
goods balance
Provisions 1.14 Stock 65.00
Cash Credit 97.00 Receivables
DOMESTIC 61.74
EXPORT 90.00
Total 259.00 Total 259.00
Sales 2021 was 280.00 lakhs. Turnover projected Rs 600 lakhs
out of which Digital Turnover Rs.300 lakhs.
INDIAN INSTITUTE OF BANKING & FINANCE
 MPBF-I MPBF -II
A. TOTAL CURRENT ASSETS 217.48 217.48
B. OTHER CURRENT LIABILITIES 88.14 88.14
C. WORKING CAPITAL GAP ( A-B) 129.34 129.34
D. MINIMUM MARGIN REQUIREMENT 32.34 31.87
( 25% OF WCG) (25% OF TCA)
E. PROJ. ACTUAL / AVAILABLE MARGIN 32.34 32.34
(NWC )
F. PBF ( C-D) 97.00 97.47
G. PBF ( C-E) 97.00 97.00
H. MPBF ( F OR G) WHICHEVER IS LOWER 97.00 97.00
INDIAN INSTITUTE OF BANKING & FINANCE
 TURN OVER METHOD FOR MSME BORROWERS

Medium Micro and small

( non-digital ) ( Digital Trxns)
A.PROJECTED AND ACCEPTED TURNOVER 600.00 600 .00 600.00(300 digital)

B. BANK LIMIT 120.00 150.00 75.00+90.00=165.00

(% of A) (20%) (25%) (25% /30%)

C.MARGIN@25% OF BANK LIMITS 30.00 37.50 18.75+22.50 = 41.25

(Margin as % of A) (5%) (6.25%) (6.25%+7.50%)
D. (Working capital requirement ) 150.00 187.50 206.25

INDIAN INSTITUTE OF BANKING & FINANCE

CASH BUDGET METHOD

INDIAN INSTITUTE OF BANKING & FINANCE

 Cash budget method
Applicable to units with working capital limits of 50 cr or more from banking
system
To seasonal industries
Contractors with unsteady cash flow
Educational institutions
Others where cash flow can be ascertained with a reasonable degree of
accuracy
Cash flow is estimated from Core Operations , Non core operations ,Capital
items and Sundries

INDIAN INSTITUTE OF BANKING & FINANCE

 Cash Budget Method
 Tells the flow of cash receipts and payments and the
gap.

 What are receipts?

 What are the payments?

 CB method funds the gap after the required margin if

any.

INDIAN INSTITUTE OF BANKING & FINANCE

 Cash inflow is from sales, other income , lease income, interest income,
receipt from debtors , capital inflows , loans

 Cash out flow is on account of purchases of raw materials, labour, factory

expenses, office expenses, interest payments , instalment payments ,
payment to creditors

 Where outflow is more than in flows there is a cash deficit . Cash deficit
is computed from month to month and the highest level of cash deficit
called peak level cash deficit is financed .

 Where there is a surplus in any month the outstanding should be nil

 Estimated Cash flow statement should be submitted in advance and

every month actual cash flow should be submitted .

 Monitoring is on the basis of actual cash flows

INDIAN INSTITUTE OF BANKING & FINANCE
 Cash Budget Method

 The process involved in cash budgeting is to :

1. Determine how much cash will be available at the

beginning of the period (fiscal year or quarter or
month).
2. Add receipts. ...
3. Deduct disbursements. ...
4. Calculate the cash excess or deficiency. ...
5. Determine financing needed. ...
6. Establish the CLOSING cash balance

INDIAN INSTITUTE OF BANKING & FINANCE

Cash Budget

INDIAN INSTITUTE OF BANKING & FINANCE 39

Computation of value of chargeable assets
Months 1 2 3 4 5

Paid up stock

Bills/Receivables

Total DP

Cumulative cash deficit

INDIAN INSTITUTE OF BANKING & FINANCE

 OTHER ASPECTS
 INFORMATION AVAILABLE ON BORROWER / SUPPLIED
BY BORROWER
 PAST PERFORMANCES / TRENDS
 Performance viz a viz peers.
 PROJECTIONS - WHETHER LINKED TO DEMAND,
CAPACITY & CAPABILITY
 INDUSTRY SCENERIO
 UTILISATION / ALLOCATION OF LIMITS
 NON FUND BASED LIMITS USED FOR MEETING
WORKING CAPITAL REQUIREMENTS

INDIAN INSTITUTE OF BANKING & FINANCE

Working Capital Limits- Disbursement
 After Assessment of total requirements pre and
post sales limits are fixed
 Drawings are allowed with in the sanctioned limits
based on the available drawing power (DP)
 DP is calculated based on the periodic information
called from borrower indicating the level of
current assets and liabilities.
 Periodical inspection/ visit to the business /
verification of books and accounts is done for
monitoring.

INDIAN INSTITUTE OF BANKING & FINANCE

INDIAN INSTITUTE OF BANKING & FINANCE
Operating Cycle Method
Working capital requirement =

Operating expenses
---------------------------------------
No. of operating cycles in a year

INDIAN INSTITUTE OF BANKING & FINANCE

Operating Cycle Method

Length of operating Cycle

a. Procurement of Raw Material 30 days

b. Conversion / Process time 15 days
c. Average time of holding of FG 15 days
d. Average Collection Period 30 days
e.Operating Cycle (a+b+c+d) 90 days
f. Operating Cycle in a year (365days) 4 cycles

INDIAN INSTITUTE OF BANKING & FINANCE

Operating Cycle Method

i. Total Operating Expenses per Annum =Rs 100 lakhs

ii. Total Turnover per Annum Rs 120 lakhs
iii. Working Capital Requirement

= Total Operating Expenses (i)

No.of operating Cycle

= 25 lakhs

INDIAN INSTITUTE OF BANKING & FINANCE

 TRADITIONAL METHOD
Drawing Power Method
(for units with small limits)
Rs Lakhs
Particulars value Margin DP
Paid stocks (RM-Creditors) 10 25% 7.5
Semi Finished goods 5 25% 2.5
Finished goods 10 25% 7.5
Book debts 10 50% 5.0
Total 35 22.50

INDIAN INSTITUTE OF BANKING & FINANCE

 Excess Or Inadequate WORKING CAPITAL
Compare
When
WC of a
analysing WC, firm with
Of the observe the that of
two,
trends over a similar
Both time period firms
inadequac
excess as y or
It should well as
have shortage
Every shortage of WC is
neither of WC
business redundant more
concern situations dangerous
/ excess are bad for
should WC nor as the firm
have any may miss
inadequat business
adequate e/ opportunit
WC to run shortage ies
its of WC
business
operations
INDIAN INSTITUTE OF BANKING & FINANCE
 Disadvantages of Excess vs Short Working
Idle Capital
funds, non-profitable for Can’t pay off its short-term
business, poor ROI
liabilities in time.
Unnecessary purchasing &
accumulation of inventories over
required level Economies of scale are not
possible.
Excessive debtors & defective credit
policy, higher incidence of Bad Debts Difficult for the firm to
exploit favourable market
Overall inefficiency in the organization, situations
too much comfort
Day-to-day liquidity
When there is excessive working worsens
capital, Credit worthiness suffers

Due to low rate of return on Improper utilization of

investments, the market value of
INDIAN INSTITUTE OF
Fixed
BANKING &
Assets & ROA/ ROI
FINANCE
shares may fall
falls sharply
DANGERS OF INADEQUATE WORKING CAPITAL
 stagnates growth
 Fixed assets are underutilized
 Operating inefficiency creeps in

INDIAN INSTITUTE OF BANKING & FINANCE

 DANGERS OF EXCESS WORKING CAPITAL

MAKES MANAGEMENT COMPLACENT

INDIAN INSTITUTE OF BANKING AND INEFFECTIVE
& FINANCE
So, what is the solution?
 Assess optimum working capital

 Release the limit timely

 Monitor periodically.

INDIAN INSTITUTE OF BANKING & FINANCE

Loan delivery system
 Purpose:- Credit discipline among the large borrowers having fund based
working capital limit of Rs.150/- crores and above from the banking system
 Minimum level of “Loan component”:-60% of the sanctioned fund based
working capital limit, including adhoc limits and TODs. The bifurcation of
the working capital limits into loan and cash credit components shall be
effected after excluding the export credit limits(pre-shipment & Post
shipment) and bills limit for inland sales from the working capital limit.
Investment by the bank in the commercial papers issued by the borrower
shall form part of the loan component provided the investment is
sanctioned as part of the working capital limit
 Loan tenor not less than 7 days and repayment of WCLs in instalments or by
way of a bullet repayment. Banks may consider rollover of WCLs subject to
compliance with extant IRAC norms.
 Sharing of Working capital finance:-All lenders in the consortium shall be
individually and jointly responsible to ensure the compliance and similarly
under multiple banking each bank to ensure compliance

INDIAN INSTITUTE OF BANKING & FINANCE

 EXERCISE 1. Cash and bank balance 3.06
2. FD with BOI(90 days-Due on 21.06.2021) 2.64
3. FD with UBI (15 months-Due on 3.4.2022) 1.00
 The following 4. Book debts older than 6 months 4.46
is the
5. Book debts less than 6 months 36.00
outstanding in
the B/S of M/s 6 Stock of raw materials 28.23
ABC & Co as 7 Stock –in-process 1.00
on 31.03.2021 8 Finished Goods 20.49
(Rs in lacs) 9 Advance given to suppliers 25.09
 Pl classify the 10 Advance to associates 12.00
current assets 11 O/S in CC(hyp ag stock) A/C 21.08
and current
12 O/S in CC (Hyp against receivables)A/c 14.00
liabilities and
workout the 13 Advance received from the buyers 6.98
MPBF as per I 14 Sundry creditors for goods 12.50
Method and II 15 Creditors for others 16.63
method of 16 Interest accrued but not due for payment 4.85
lending
17 Provision for dividend 2.80
INDIAN INSTITUTE OF BANKING & FINANCE
18 Other short term liabilities 1.30
Solution
 Method I Method II
 Current Assets 117.51 117.51
 Current Liabilities(Excl B B) 45.06 45.06
 WCG 72.45 72.45
 Margin @25% 18.11 29.38
 NWC (CA-CL)(117.51-*80.14) 37.37 37.37
• 45.06+BB 35.08
 MPBF 35.08 35.08

INDIAN INSTITUTE OF BANKING & FINANCE

ANY QUESTIONS?

THANK YOU

R.KANCHANAMALA

MOB:+91 7045660165

E.mail: kanchanamala@iibf.org.in
INDIAN INSTITUTE OF BANKING & FINANCE