PRESENTATION ON: PRESENTATION ON WORKING CAPITAL ANALYSIS PowerPoint Presentation: Lending for working capital A banker’s main role as a lender for meeting the working capital requirements is to supplement the borrowers’ resources in built up of a reasonable level of current assets in relation to his production requirements FACILITIES: FACILITIES O\C\C (Hypn of stocks) O\C\C (Book Debts) Overdraft Against Supply Bills Cheque/Bill discounting facility Pre shipment and Post shipment finance Working Capital Term Loans (WCTL) LCs And BGs Working Capital Finance - STAGES: Working Capital Finance - STAGES 1. GENERAL APPRAISAL 2.ASSESSMENT OF REQUIREMENTS OPERATING CYCLE –HOLDING PERIOD PERMISSIBLE METHOD –NAYAK COMMITTEE /MPBF/CASH BUDGET METHOD MARGIN AVAILABILITY SOURCES OF MARGIN 3.SANCTION AND DISBURSEMENT 4.SUPERVISION & FOLLOW UP Appraisal of WC limits : Appraisal of WC limits I OBTAIN APPLICATION FOR WC FINANCE AUDITED FINANCIALS FOR THE PREVIOUS 3 YEARS DETAILS OF EXISTING BORROWING ARRANGEMENTS (IF ANY) PROFILE OF PROMOTERS PRELIMINARY APPRAISAL: PRELIMINARY APPRAISAL OBTAIN OPINION REPORTS FROM -- EXISTING BANKERS OF THE APPLICANT COMPANY \ FIRM -- TERM LENDERS -- BANKERS OF THE ASSOCIATE COs MARKET REPORTS WITH REGARD TO THE ANTECEDENTS \ TRACK RECORD OF THE BORROWER & GUARANTOR CREDIT REPORT COMPILATION -- FINER POINTS PRELIMINARY APPRAISAL CONTD…: PRELIMINARY APPRAISAL CONTD… EXAMINE BANK’S LENDING POLICY \ CENTRAL BANK’S GUIDELINES & POLICIES PRUDENTIAL EXPOSURE NORMS GROUP EXPOSURE RESTRICTIONS PRELIMINARY APPRAISAL CONTD…: PRELIMINARY APPRAISAL CONTD… BUSINESS RELATED RISK FACTORS LIST OF DEFAULTERS CAUTION LISTS LINE OF ACTIVITY AND THE INDUSTRY SCENARIO GOVERNMENT REGULATIONS IMPACTING ON BUSINESS PRELIMINARY APPRAISAL CONTD…: PRELIMINARY APPRAISAL CONTD… COMPLIANCE REGARDING TRANSFER OF BORROWAL A\Cs FROM ONE BANK TO ANOTHER ,IF APPLICABLE INSPECTION OF THE FACTORY\ PLACE OF BUSINESS PHYSICAL VERIFICATION OF THE PROPERTY OFFERED AS COLLATERAL PRELIMINARY APPRAISAL CONTD…: PRELIMINARY APPRAISAL CONTD… VALUATION REPORT OF THE COLLATERAL PROPERTY - REASONABLE ? SCRUTINY OF LEGAL OPINIONS BEFORE MORTGAGE TO ENSURE “ CLEAN, ABSOLUTE AND MARKETABLE TITLE” TO THE PROPERTY ANALYSIS AND APPRAISAL: ANALYSIS AND APPRAISAL DISCUSS WITH THE BORROWER THE BASIS FOR ASSUMPTIONS ON THE I) PROJECTED SALES , PROFITABILITY AND OTHER ITEMS ii) CURRENT ASSET BUILD UP iii) CURRENT LIABILITY ESTIMATES COMMENT ON UNUSUAL ITEMS IN FINANCIAL STATEMENTS (CHANGE IN THE METHOD OF DEPN. ETC.,) ANALYSIS AND APPRAISAL: ANALYSIS AND APPRAISAL CRITICALLY EXAMINE THE ITEMS INCLUDED IN OTHER CURRENT LIABILITIES AND OTHER CURRENT ASSETS SCRUTINISE THE QUALIFYING REMARKS OF THE AUDITORS IN THE BALANCE SHEET EXAMINE THE NATURE OF CONTINGENT LIABILITIES WORKING CAPITAL: WORKING CAPITAL WORKING CAPITAL MAY BE DEFINED AS FUNDS REQUIRED TO CARRY THE REQUIRED LEVEL OF CURRENT ASSETS TO ENABLE THE INDUSTRY TO CARRY ON ITS OPERATIONS AT THE EXPECTED LEVELS UNINTERRUPTEDLY PowerPoint Presentation: Working Capital terminology Gross working capital – represented by Current Assets Inventory Receivables Cash Other current assets Working capital gap – represented by Current assets less other current liabilities Bank borrowings excluded PowerPoint Presentation: What is operating cycle ? It is the time elapsed between Injection of cash for purchase of raw material, and Realisation of cash out of sale proceeds of finished goods This money may be used again for a fresh batch of production The operating cycle is continuous, not discrete METHODS OF WC ASSESSMENT: METHODS OF WC ASSESSMENT 1. OPERATING CYCLE METHOD CASH Drs RM Crs. FG SIP RMH 25 days --SIP 2 days--FGH 18 days--Drs 15 days--Crs 10 days Length of the cycle= 25+2+18+15-10=50 days PowerPoint Presentation: WC assessment on turnover method (Nayak committee) Applicable for Village/Tiny/SME units with WC limits upto Rs. 5 Cr.-Others up to Rs.2.00 crore The computation method prescribed is simple WC requirement is computed at 25% of accepted sales (Projected Annual Turnover)-PAT Bank finance is 80% of the WC requirement i.e. 20% of PAT The prescriptions relate to computation of WC limits only Banks would examine other aspects of appraising WC requirements in the usual manner NAYAK COMMITTEE: NAYAK COMMITTEE W/C Assessment : W/C of Village/Tiny/SME units enjoying Fund based credit limits upto Rs.5.00 Crore from the banking system are to be computed on the basis of a minimum of 20% of the Projected Turnover. Units to bring in at least 5% of their T.O as margin money 25% T.O (B/B) 20% 5%(Margin) PowerPoint Presentation: WC assessment on turnover method (Nayak committee) Points to ponder Projected Annual Turnover (PAT) includes excise duty Promoters’ contribution (NWC) 5% min. If existing NWC >5%, this is to be retained Turnover method applicable for computation of WC amount only Other elements of appraisal have not been dispensed with Accuracy of projected sale is the determining factor, if other parameters are satisfactory PowerPoint Presentation: Assessing Working Capital requirements MPBF method-TANDON Committee First method : MPBF is 75% of WC Gap (Transitional step) Second method : MPBF = WC Gap less 25% of CA the second method thus had a minimum Current Ratio requirement of 1.33. (First Method 1.17) MPBF system also required compliance with holding norms for various industry groups The third method considered a core assets component which was required to be entirely financed from long term funds by the borrowers - remaining portions only to be financed by banks as per second method - not accepted by RBI MPBF system ruled the Working Capital financing by banks for more than two decades TANDON COMMITTEE AND MPBF: TANDON COMMITTEE AND MPBF Salient recommendations 1) Inventory norms 2) Approach to lending - methods,CMA forms 3) Style of credit 4) Information system Limitations of MPBF system RBI guidelines for new system of assessment for working capital BALANCE SHEET ANALYSIS: BALANCE SHEET ANALYSIS CLASSIFICATION OF CURRENT ASSETS AND CURRENT LIABILITIES NON CURRENT ASSETS TERM LIABILITIES CAPITAL & RESERVES FIXED ASSETS MISC. ASSETS INTANGIBLE ASSETS BALANCE SHEET ANALYSIS: BALANCE SHEET ANALYSIS TANGIBLE NETWORTH TOTAL OUTSIDE LIABILITIES CONTINGENT LIABILITIES ( Bills discounted with banks ) BALANCE SHEET PERSPECTIVES: BALANCE SHEET PERSPECTIVES ANALYSIS OF BALANCE SHEET CURRENT ASSETS AND CURRENT LIABILITIES DEFINITIONS -- NWC AND GWC CL CA TL FA MA NW IA NWC RATIO ANALYSIS: RATIO ANALYSIS CURRENT RATIO LIQUIDITY RATIO TOL\TNW INVENTORY TURNOVER RATIO DEBTORS TURNOVER RATIO CREDITORS TURNOVER RATIO BEYOND THE B\S PERSPECTIVE: BEYOND THE B\S PERSPECTIVE QUALITY OF MANAGEMENT MANAGERIAL EFFICIENCY TECHNOLOGY MARKETING STOCK MARKET PERCEPTIONS GROWTH PROSPECTIVES RAW MATERIAL: RAW MATERIAL WHY SHOULD AN UNIT KEEP RM-SOURCE-AVAILABILITY-ORDERING PATTERN-COSTING WHAT ARE THE MAJOR FACTORS FOR HOLDING RM INVENTORY LEVELS? Availability, Lead Time, EOQ, Seasonality, Imported / indigenous Expressed in terms of …months.days of consumption RMI=RMC/365 OR 12 X RMHP STOCK - IN - PROCESS: STOCK - IN - PROCESS Stock - in - process -- Major factors for funds blockage in this leg of operation PROCESING TIME NUMBER OF SHIFTS PROCESS TECHNOLOGY BATCH QUANTITY NUMBER OF PRODUCTS HANDLED AT A TIME EXPRESSED IN TERMS OF COST OF PRODUCTION SIPI= COP/365 OR 12 X SIPHP FINISHED GOODS: FINISHED GOODS Finished Goods Major factors for stocking Finished Goods Supply terms transport bottlenecks pre-dispatch inspection seasonality expressed in terms of COGS FGI=COGS/365 OR 12 * FGHP RECEIVABLES: RECEIVABLES Sundry Debtors --- to meet the competition --- trade practices Associate concern’s name constantly appearing? Expenses normally one month’s expenses provided Details of the assessment : Need based approach Debtors Level= Cr. Sales/365 or 12 x Drs. Realization Period CREDITORS: CREDITORS Sundry Creditors -Past trade practices - Establish reputation of the unit Associate concern’s name constantly appearing? Details of the assessment : Need based/Past Trend approach Creditors Level= Cr. Purchases/365 or 12 x Crs. Payment Period WC AND VARIOUS SOURCES OF FINANCE: WC AND VARIOUS SOURCES OF FINANCE RAW MATERIAL STOCKS IN PROCESS FINISHED GOODS DEBTORS OTHER CAs # OTHER CURRENT LIABILITIES & SUNRY CREDITORS BANK BORROWINGS NET WORKING CAPITAL GUIDELINES FOR LENDING BY BANKS- CONCEPT OF MPBF - REVIEW OF POLICY: GUIDELINES FOR LENDING BY BANKS- CONCEPT OF MPBF - REVIEW OF POLICY FOR VILLAGE/TINY/SME BORROWERS(5 CR.)/OTHERS (2 CR.) -- TURNOVER METHOD SME(> 5 CR.<10 CR.)/OTHERS (> 2 CR)-MPBF IF ABOVE TWO WANTS TO SHIFT CASH BUDGET-PERMITTED FOR LARGE BORROWERS(10 CR. & ABOVE) SEASONAL INDUSTRIES- CASH BUDGET SYSTEM RETENTION OF MPBF PERMITTED IN THE CASE ABOVE IT- UP TO 2 CR.-TURNOVER; > 2CR- CASH BUDGET SYSTEM INVENTORY MANAGEMENT: INVENTORY MANAGEMENT Types of Inventory Normal Inventory eligible for Bank Safety Inventory finance Speculative Inventory - with a view to realising stock profit Flabby Inventory -- arising out of poor w/c management What is EOQ ? Inventory control: Inventory control ORDERING COSTS CARRYING COSTS COSTS IN PLACING THE ORDER INTEREST ON FINANCE, GODOWN RENT, INSURANCE Inventory Control : When to order ? How much to order? Inventory Control Lead Time consumption Ordering costs Carrying costs INVENTORY CONTROL: INVENTORY CONTROL EOQ = 2CO / IP GOLDEN MEAN BETWEEN THE TWO COSTS IS TO BE ACHIEVED TO KEEP THE INVENTORY COSTS AT THE OPTIMUM C = Annual consumption quantity O = Cost of ordering per order P = Cost of one unit of Inventory I = Carrying cost PowerPoint Presentation: THANK YOU ALL !