Procedure for Assessment of Working Capital Requirements.

A borrower needs funds for its operations mainly to finance its current assets. To have a norms for working capital assessment a study group was set up in 1974 headed by Sri P.L.Tandon, who framed the guidelines for working capital Assesment. The group suggested 3 methods for working capital assessment to find out the permissible level of bank borrowings. The three methods of assessment of working capital requirements intends to progressively improve the investment from the borrowers long term resources. The study group recognized the other current liabilities, i.e. other than short term Banks borrowing as an external source of finance available to the borrower , therefore the group defined the working capital gap or net current assets as the excess of current assets over current liabilities. Under the first method of working capital assessment 25% of working capital gap is expected to be met from the long term source of borrowers. Under the second method, 25% of the current Assets themselves are expected to be met from the long term source of the borrower. Under the third method, a part of the current assets representing the hard core or core current assets is to met from net working capital as also 25%of the balance current assets called real current assets. Example: Suppose working capital requirement is 100 lac, other current assets is 20, core current assets is 28. Rs. In Lac First Method Current Assets 100 Oth. current Liabi 20 Second Method Current Assets 100 25% of this 25 from long term source W.C Gap 75 Other Current Libilities MPBF 20 Third Method Current Assets 100 Core Current 28 assets Real Current Assets 25% from long term source of borrowers Other Liabilities MPBF 72 18

W.C Gap/Nett CA 25% from long term source of borrowers MPBF

80 20

60

55

20 34 1.28

Current Ratio

1.25

1.33

1.85

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