Working capital , turnover method, MPBF method

1. Presentation on
Working Capital Assessment
Presented To: Presented by:
Mr. Ajay Kumar Gupta Ms. Chandni Soni
Ms. Manjari Priya
Mr. Ankur Kumar
Mr. Dheeraj Singh
Mr. Rahul Kumar
Mr. Rohit Sharma
Mr. Akshat Kumar Srivastava
Group 8, Sec-A, ABYB-11

2. OVERVIEW
TOPICS PRESENTER
INTRODUCTION OF WORKING CAPITAL FINANCE
, DEFINATION
CHANDNI (Slide 3 to
5)
HOW TO CALCULATE WORKING CAPITAL? ROHIT (Slide 6,7)
WORKING CAPITAL CYCLE AKSHAT (Slide 8 to
12)
METHODS OF WCA- OPERATING CYCLE METHOD DHEERAJ (Slide 13
to 16)
TURNOVER METHOD RAHUL (Slide 17,18)
CASH BUDGET METHOD ANKUR (Slide 19 to
23)
MPBF METHOD-TANDON COMMITTEE MANJARI (Slide 24
to 30)

3. “A firm having no profit maybe treated as sick but
not having liquidity may die over a period of time”
 Working capital financing forms a major part of the
day to day activities of a finance manager.
 It is a very crucial activity and requires continuous
attention.
 Without appropriate and sufficient working capital
financing, a firm may get into troubles.
 Insufficient working capital may result into non-
payment of certain dues on time.

4. What is working capital finance?
It is a business finance designed to boost the working capital
available to a business.
What is working capital ?
Working capital is the amount of cash a business can safely
spend.
Working capital refers to Current Assets and Current
Liabilities.

8. Working Capital Cycle
T
The Working Capital Cycle for a
business is the length of time it takes
to convert the total net working capital
(current assets minus current
liabilities) into cash.

9. Steps in the Working Capital
Cycle

10. Working Capital Cycle Formula

12. Negative Working Capital Cycle

13. Methods of Working Capital Assessment
a. Operating Cycle Method.
b. Turnover Method
c. Cash Budget method
d. MPBF (Maximum Permissible Bank Finance)

14. Operating Cycle Method
Meaning of operating cycle:
a. Operating cycle means the cycle of raw material to work in
progress to finished goods to accounts payable and finally to
cash. Operating cycle time is the time taken starting from
raw material purchases to its conversion into cash.
b. It begins with acquisition of raw materials and ends with
collection of receivables.

15. Stages:
1)Raw materials (RM/RM consumption)
2)Work-in-process (WIP/COP)
3)Finished Goods (FG/COS)
4)Receivables (Debtors/Credit sales)
Less:
Creditors (creditors/purchases)

16. Example of Operating Cycle

17. Turnover Method
(originally suggested by Nayak
Committee for SSI units)
a. Under turnover method the aggregate fund based working capital
limits are computed on the basis of Minimum of 20% of their
projected annual turnover.
b. The borrower has to bring margin of 5% of the annual turn-over of
such borrowers as margin money.
c. The WC requirements may be worked out on the basis of Naik
Committee recommendations for working capital limit upto Rs.6
crores from the banking system.
d. On the basis of minimum of 20% of their projected annual
turnover for new as well as existing units, beyond which WC be
computed on the basis of WC cycle.
e. In case of borrowers desiring facilities under Naik Committee
recommendations and having a WC cycle of more than 3 months
in a year, the WC requirements will be funded after assessing his
requirements on the basis of his WC cycle, after fixing proper
margins.

18. Example of Turnover Method

19. CASH BUDGET METHOD
• A cash budget is a forecast of estimated cash
receipts, estimated cash payments and the resultant
cash position for a certain period of time.
• Done on a shorter time frame than other
statements. (i.e., month-by-month
or even week-by week).

20. Importance of cash budget
 1. It enables the management to determine the timing
when there is likely to be a surplus/ shortage of cash.
 2. It enables the management to determine the
quantum of surplus/shortage of cash.
 3. It enables the management to determine the period
for which the situation of shortage / surplus is likely
to be continued.
 4. It enables the management to perpare the borrowinf
schedule.
 5. It enables the management to plan for financing a
new project.
 6. It enables the management to take advantage of
cash discount.

21. Methods of preparation
Receipts and Payment methods:-
Under this method all the cash receipts and
payments expected during the budget
period is considered. However care must be
taken to ensure that cash adjustments and
accruals are not shown in cash budget.

22. CASH INFLOWS
Sales and other cash income
New loans
Capital assets

23. Cash Outflows
Cash expenses
Principal payments
Purchase of capital
Assets Nonfarm

24. MPBF METHOD OF WORKING
CAPITAL
 MPBF stands for Maximum Permissible
Banking Finance in Indian Banking Sector.
MPBF is mainly a method of working capital
assessment. As per the recommendations of
Tandon Committee, the corporate are
discouraged from accumulating too much of
stocks of current assets and are
recommended to move towards very lean
inventories and receivable levels. This is
where MPBF comes into picture. There are 2
methods for MPBF calculation.

25. Terminologies of calculating
MPBF
 Current Assets(C.A.): Inventories + Raw
materials + Work in Progress + Finished
Goods + Accounts Receivable
 Current Liabilities(C.L.): Creditors +
Bank Borrowings
 Other Current Liabilities(OCL): CL-Bank
Borrowings
 Working Capital Gap(WCG): CA-OCL

26. Formula of Calculating MPBF
 Corporate to arrange/contribute 25% of working capital gap
as margin and bank would finance the remaining 75% of the
gap.
 Formula to calculate MPBF
 MPBF = WCG – Margin
 Margin = 25% of WCG
 MPBF = 75% of WCG
 To understand better example is given here
A) CA = Rs. 500L
B) CL = Rs. 150L
C) Bank Borrowings = Rs. 50L
D) OCL (B-C) = (Rs. 150L – Rs. 50L) = Rs. 100L
E) WCG (A-D) = (Rs. 500L – Rs. 100L) = Rs. 400L

27.  Corporate to arrange/contribute 25% of working capital gap
as margin and bank would finance the remaining 75% of the
gap.
 Formula to calculate MPBF
 MPBF = WCG – Margin
 Margin = 25% of WCG
 MPBF = 75% of WCG
 To understand better example is given here
A) CA = Rs. 500L
B) CL = Rs. 150L
C) Bank Borrowings = Rs. 50L
D) OCL (B-C) = (Rs. 150L – Rs. 50L) = Rs. 100L
E) WCG (A-D) = (Rs. 500L – Rs. 100L) = Rs. 400L

28. 2nd method of Calculation
 So the MPBF would be
 Margin = 25% of CA
 (0.25% * 500L) = 125L
 MPBF = Rs.400L – 125L = 275L
 Current Ratio would be
 500L/100L+275L = 500L/375L = 1.33L
 This is how we calculate MPBF from
2nd method

29.  Tandon Committee Recommendation on
MPBF
A study group under the chairmanship of Shri P.L.
Tandon was constituted in 1974 by the RBI in order to
frame guidelines for bank credit.
 Terms of reference
1. To suggest guidelines for commercial banks to follow
up and supervise credit from the point of view of
ensuring proper end-use of funds and keeping a watch
on the safety of advances.
2. To make recommendations for obtaining periodical
information that may be obtained by banks from the
borrower.

30. Terms of reference
3. To make suggestions for prescribing inventory
norms for different industries.
4. To suggest criteria regarding satisfactory capital
structure and sound financial basis in relation to
borrowings.
5. To suggest whether the existing patterns of
financing working capital requirements by cash
credit / overdraft system, etc. are required to be
modified, if so, to suggest modifications.

32. ANY QUESTION?