Working capital assessment

Prof. b.p.mishra XIMB

HOLDING PERIOD METHOD

Assumptions
ITEM GROSS SALE

AMOUNT IN 000 12000

CONSUMPTION OF RM &SALES
POWER & FUEL LABOUR

7680
480 1680

OTHER MFG COST

DEPRECIATION CHANGE IN CLOSING STOCK SIP & FG COST OF PRODUCTION INTEREST COST TOTAL COST PROFIT BEFORE TAX PROVISION FOR TAX

360
600 -240 10560 240 11160 840 300
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SALES ADMIN & OTHER EXPENSES 360

Therefore
GROSS SALES PER MONTH 1000

RM CONSUMPTION PER MONTH

COST OF PRODUCTION PER MONTH

640
880

EXPENSES PER MONTH (10560 7680-600 +240 +360 ) /12

240

Actual NWC available as per latest financial statement 600 Trade Credit available (1/2 month R.M. consumption) --320
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ITEM (i)

Holding period(ii)

Holding amount (iii) 1280 440 880 500 240 3340

Margin Rate (iV) 25% 40% 25% 30% 100%

Margin Amount (v) 320 176 220 150 240 1106

Net Amount (vi)= (iii V) 960 264 660 350 0 2234*

RAW MATERIAL SIP FINISHED GOODS

2M 0.5M 1M

RECEIVABLES 0.5M EXPENSES TOTAL 1M

TOTAL WC REQUIRED LESS NWC AVAILABLE LESS TRADE CREDIT AVAILABLE PERMISSIBLE BANK FINANCE BANK FINANCE RECOMMENDED

3340 -600 -320 2420 2200*

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This leaves a deficit of Rs 2.20 lakh towards funding the working capital requirements. The cash accrual after tax is worked out as Rs 11.40 lakh. As the operating cycle of the enterprise is 4 months, there are three operating cycle for a year.

The amount of cash accrual estimated for a cycle is Rs 3.80 lakh that takes care of the deficit.
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Nayak committee - SSI

Recommendation
The minimum loan to any SSI unit by Banks Shall be 20% of Projected Annual Turnover (PAT) The margin contribution by borrower is 5% of PAT

The lending norm assumes that WC requirement of an SSI Is 25% of PAT. PAT includes excise duty implying Gross sales.
Therefore ,it assumes working capital cycle of 3 months. It is now applicable for loan amount of Rs 5 crore to MSMEs. It sets the minimum and do not preclude the bank to assess in any other methods of appraisal traditionally foll0wed by them.
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If by Holding period of assessment, the loan component Is higher, the higher loan to be given if margin permits. If by Holding period method, the assessed amount is lower, Nayaks minimum to be given by banks. The scheme postulates an ideal level of bank finance to the Borrowers margin should be 80 : 20. In case the borrower has higher margin in the business, it can not be withdrawn i,e margin can be 25% , 30 % etc.

Seasonal Activity
Suppose the PAT of Rs 120 lakh are evenly spread. Then the bank limit is - 24 lakhs. ( as per Nayak method ) Let the Unit have seasonality, first 6 months have 90 lakh sales, Next 6 months are only 30 lakh sale.

If we give Rs24 lakh limit uniformly, what is the problem?

 It will be under financed for 1st half

It will be over financed for 2nd half

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Assessment of Peak and Nonpeak limit

LEVEL (I) PERIOD (II ) SEASONA ANNUALISE Minimum L D SALE WC SALE (IV ) Limit 20% (III ) OF (IV ) 90 90 /6 * 12 36 =180

PEAK LEVEL

6 MONTHS

NONPEAK LEVEL

6 MONTHS

30

30 /6 * 12 = 60

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SMALL LOANS WC ASSESSMENT

COMPOSITE LOANLARGE NUMBERS SMALL REQUIREMENT MONITORING DIFFICULTY LACK OF FINANCIAL DATA

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(IN Rs)
Sales per month 50,000

Raw material, power wages etc

Drawing made by promoter for sustenance Total expenses per month Surplus per month ESTIMATED OPERATING CYCLE Raw material holding Semi finished goods Finished goods Receivables

38000
7000 45000 5000

1 month month month 1 month

Total working capital cycle

3 months

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Gross WC requirement = Total expenses per month * Total working capital cycle

Assessme nt45,000
*3 = 1,35,000

Less approxmate amount of credit available On purchases at any other time

Less Promoters contribution

15,000

30,000

WC credit requirement

= 90,000

As per Nayak norm the loan would have been 1.20 lakh. Bank has to give limit of 1.20 lakh, Subject to available DP. OR give a composite loan of RS 1.20 lakh to be paid Rs2500 pm plus interest applied.

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Thank you & HAPPY DIWALI

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