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Working capital assessmentProf. b.p.mishra

XIMB

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HOLDING PERIOD METHOD

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Assumptions

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ITEM AMOUNT IN 000

GROSS SALE 12000

CONSUMPTION OF RM &SALES 7680

POWER & FUEL 480

LABOUR 1680

OTHER MFG COST 360DEPRECIATION 600

CHANGE IN CLOSING STOCK SIP &

FG

-240

COST OF PRODUCTION 10560

INTEREST COST 240

SALES ADMIN & OTHER EXPENSES 360

TOTAL COST 11160

PROFIT BEFORE TAX 840

PROVISION FOR TAX 300

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Therefore

GROSS SALES PER

MONTH

1000

RM CONSUMPTION PER

MONTH

640

COST OF PRODUCTION

PER MONTH

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)

Margin

Rate

(iV)

Margin

Amount

(v)

Net

Amount

(vi)= (iii V)

RAW

MATERIAL

2M 1280 25% 320 960

SIP 0.5M 440 40% 176 264

FINISHED

GOODS

1M 880 25% 220 660

RECEIVABLES 0.5M 500 30% 150 350

EXPENSES 1M 240 100% 240 0

TOTAL 3340 1106 2234*

TOTAL WC REQUIRED 3340

LESS NWC AVAILABLE -600

LESS TRADE CREDIT AVAILABLE -320

PERMISSIBLE BANK FINANCE 2420

BANK FINANCE RECOMMENDED 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

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RecommendationThe 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 financeto 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.

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Seasonal Activity

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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?

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It will be under financed for 1st half

It will be over financed for 2nd half

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Assessment of Peak and Non-

peak limit

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LEVEL

(I)

PERIOD

(II )

SEASONA

L

SALE

(III )

ANNUALISE

D SALE

(IV )

Minimum

WC

Limit 20%

OF(IV )

PEAK

LEVEL

6

MONTHS

90 90 /6 * 12

=180

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NON-

PEAK

LEVEL

6

MONTHS

30 30 /6 * 12 =

60

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SMALL LOANS WC

ASSESSMENT

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COMPOSITE LOAN-

LARGE NUMBERS

SMALL REQUIREMENT

MONITORING DIFFICULTY

LACK OF FINANCIAL DATA

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Sales per month 50,000Raw material, power wages etc 38000

Drawing made by promoter for sustenance 7000

Total expenses per month 45000

Surplus per month 5000

ESTIMATED OPERATING CYCLE

Raw material holding 1 month

Semi finished goods month

Finished goods month

Receivables 1 month

Total working capital cycle 3 months

(IN Rs)

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Assessme

nt

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Gross WC requirement =

Total expenses per month *

Total working capital cycle

45,000

*3 =

1,35,000

Less approxmate amount of

credit available

On purchases at any other time

15,000

Less Promoters contribution 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