The document discusses various methods for assessing working capital requirements, including the operating cycle method, drawing power method, turnover method, and cash budget method. It also outlines the types of current assets, factors that influence working capital needs, and different forms of working capital financing such as cash credit, bill financing, and non-fund based limits like letters of credit.

1. WORKING CAPITAL
ASSESSMENT
-Umang Soni
-WRO0276669

2. Funds required to fulfill short term
obligations & smoothly conduct
routine business operations.
Gross WC Net WC

3. WHAT ARE CURRENT ASSETS ?
Assets which are normally converted into
cash during the operating cycle of the entity.
 Cash & Bank balances
 Inventory
 Receivables
 Advances to suppliers/others
 Marketable Securities
 Other Current assets

4. OPERATING CYCLE
It begins with acquisition of raw materials
and ends with collection of receivables.
Raw Materials (RM/RM Consumption)
Add: Work-In-Process (WIP/COP)
Add: Finished Goods (FG/COS)
Add: Receivables (Debtors/Credit sales)
Less: Creditors (Creditors/Purchases)
Operating Cycle

5. FACTORS INFLUENCING WORKING
CAPITAL REQUIREMENT
 Nature of Business & Operations
 Production Policy
 Market conditions
 Conditions of supply of RM / stores &
spares, etc.
 Level of activity & Operating Cycle

6. WORKING CAPITAL FINANCE
A) Fund Based
Cash Credit / Overdraft Packing Credit
Demand Loan Bill Finance
B) Non Fund Based
Letter of Credit Bank Guarantee

7. WORKING CAPITAL ASSESSMENT
METHODS
 Operating Cycle Method
 Drawing Power Method
 Turnover Method
 MPBF Method
 Cash Budget Method

8. OPERATING CYCLE METHOD
A. Length of Operating Cycle
a. Procurement of Raw Material
b. Conversion / Process time
c. Average Finished Goods Holding Period
d. Average Collection Period
e. Average Supplier’s Credit Period
f. Operating Cycle (a + b + c + d - e)
g. No. of Operating Cycles in a year
(365 days / f)

9. ……OPERATING CYCLE METHOD
Working capital requirement
Operating Expenses p.a.
= ---------------------------------------------
No. of Operating Cycles in a year

10. DRAWING POWER (DP) METHOD
Particulars Security Margin DP
Paid Raw Material (a) (e) [a * (1-e)]
(RM-Creditors)
Semi Finished (b) (f) [b * (1-f)]
goods
Finished goods (c) (g) [c * (1-g)]
Book debts (d) (h) [d * (1-h)]
Total

11. TURNOVER METHOD
(originally suggested by NAYAK Committee)
A Sales Turnover
B 25% of Sales Turnover
C 5% of Sales Turnover projected as Margin
D Actual NWC existing as per Last Financial
Statement
E B–C
F B–D
G MPBF (E or F whichever is less)
H Additional margin to be brought in (C-D)

12. MPBF METHOD
(TANDON’S II Method of Lending)
A Current Assets
B Current Liabilities other than Bank
Borrowings
C Working Capital Gap (A - B)
D Minimum Stipulated NWC (25% of CA
excluding export receivables)
E Actual / Projected NWC
F C–D
G C–E
H MPBF (F or G whichever is less)

13. CASH BUDGET METHOD
 Forecasted Cash Flow Statement showing
estimates of cash receipts, cash payments
and net cash balance over the project term.
 Peak deficit is financed.
 Banks & Financial Institutions supervise the
end use of the funds sanctioned through
actual Cash Flow.

14. BILL FINANCE
 For genuine trade & manufacturing
transaction
 Various Types:
 Discounting / Purchase of Bills of
Exchange
 Cheque Purchase
 Advance against delivery
 Advance against acceptance
 Packing Credit

15. NON FUND BASED LIMITS
 Letter of Credit:
 Bills sent for Collection:
 Bank Guarantee:
Performance / Financial
Inland / Foreign

16. JUSTIFICATION OF THE PERFORMANCE
PROJECTION
For Existing Units:
 Intra-Firm Comparison (i.e. Trend Analysis)
 Inter-Firm Comparison
 Evidences (Orders in Hand, Orders in
Pipeline)
For New Units:
 Pure Play Technique
Note: Higher projections should be justified.