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    Bank Management: MBA Iimc Oct - Jan 2020 Praloy Majumder

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    Liontini
    The document discusses the process of assessment of working capital requirements by banks. It explains the key components of working capital - current assets, current liabilities, and working capital gap. It discusses different ratio analyses and cash flow analysis conducted to evaluate a company's profitability, leverage, liquidity, and returns. The document also explains different methods of assessing fund based working capital limits, including turnover method, operating cycle method, and cash budgeting method. It provides examples to illustrate calculation of working capital under the turnover method.

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    Bank Management: MBA Iimc Oct - Jan 2020 Praloy Majumder

    Uploaded by

    Liontini
    31 views28 pages
    The document discusses the process of assessment of working capital requirements by banks. It explains the key components of working capital - current assets, current liabilities, and working capital gap. It discusses different ratio analyses and cash flow analysis conducted to evaluate a company's profitability, leverage, liquidity, and returns. The document also explains different methods of assessing fund based working capital limits, including turnover method, operating cycle method, and cash budgeting method. It provides examples to illustrate calculation of working capital under the turnover method.

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    The document discusses the process of assessment of working capital requirements by banks. It explains the key components of working capital - current assets, current liabilities, and working capital gap. It discusses different ratio analyses and cash flow analysis conducted to evaluate a company's profitability, leverage, liquidity, and returns. The document also explains different methods of assessing fund based working capital limits, including turnover method, operating cycle method, and cash budgeting method. It provides examples to illustrate calculation of working capital under the turnover method.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    31 views28 pages

    Bank Management: MBA Iimc Oct - Jan 2020 Praloy Majumder

    Uploaded by

    Liontini
    The document discusses the process of assessment of working capital requirements by banks. It explains the key components of working capital - current assets, current liabilities, and working capital gap. It discusses different ratio analyses and cash flow analysis conducted to evaluate a company's profitability, leverage, liquidity, and returns. The document also explains different methods of assessing fund based working capital limits, including turnover method, operating cycle method, and cash budgeting method. It provides examples to illustrate calculation of working capital under the turnover method.

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    of 28

    Bank Management

    MBA
    IIMC
    Oct – Jan 2020
    Praloy Majumder
    1
    Type of credit facility by bank
    Reason for
    financing

    Current Non Current Repayment


    Asset Asset of liability

    Working Term Loan / Term Loan /


    Capital Project Loan Project Loan

    FBWC NFBWC

    2
    Working Capital
    Production

    Borrowing

    Repayment Sales

    Realisation
    Assessment of Working
    Capital …
    • The working capital facility of a company
    consists of two types of facilities :
    – Fund Based Facility
    – Non Fund Based Facility
    • Though the final assessment of fund based
    facility is carried out by the lender, the
    process starts from company’s end.
    • If company is aware of the process of
    assessment of working capital , it would be
    able to sanction its working capital as per its
    requirement. 5
    What is Assessment??
    • Assessment is defined as the process by which
    one can determine the maximum amount of
    fund can be availed from institutional lender
    to meets a company’s working capital
    requirement.
    • So assessment of working capital for a
    corporate means the process of arriving at the
    maximum quantum of working capital
    requirement of a corporate for a particular
    period.
    6
    Financial statement
    projections
    Ratio
    analysis

    Past Future

    Profitability Leverage Liquidity Return

    7
    Profitability ratio

    Profitability

    Net Profit EBITDA


    Margin Margin

    8
    Leverage ratio

    Leverage

    TOL/ATNW DSCR ISCR

    9
    Liquidity Ratio

    Liquidity
    Ratio

    Current Quick
    Ratio Ratio

    10
    Return Ratio

    Return
    Ratio

    ROE ROCE

    11
    Cash flow analysis

    Cash Flow
    Analysis

    Cash Flow Cash Flow Cash Flow


    from from from
    Operation Financing Investment

    12
    Process Flow

    Actual Financial Numbers

    Projected / Estimated P&L

    Projected /Estimated B/S

    13
    Calculation of Working
    capital

    Determine Determine
    Determine
    the Current the Working
    the Creditor
    Asset Capital Gap
    Determination of Current
    Asset
    Sales Estimate
    Expenses Estimate
    Profit Estimate
    Determination of Current
    Asset
    RM Cycle Estimate
    WIP Cycle Estimate

    Finished Goods Estimate


    Determination of Current
    Asset
    Receivable Cycle Estimate

    Other Current Asset


    Estimate
    Cycle

    Cash and Bank


    Estimate
    Balance Cycle
    Determination of Other
    Current Liability
    Creditor Cycle Estimate

    Other Other Current


    Estimate
    Liability

    Provisions Cycle Estimate


    Working Capital GAP

    • Understanding the process of arriving


    at current asset from personal
    discussion :
    – Current asset is a balance sheet item
    – Expenses is a P&L Item
    – How to convert the P&L Item to Balance
    sheet item
    • Understanding the process of arriving
    at current liability from personal
    Meaning of Working capital
    Gap
    • Working capital Gap = CA- OCL
    • What does it mean ?
    • How it is related to working capital
    finance?
    • Is it good or is it bad ?
    • Which kind of gap should be funded
    and which kind of gap should not be
    funded
    Meaning of margin Money for
    working capital
    • Margin Money for working capital
    • Net working capital
    • How the above two are different ?
    • Finding out the techniques to
    determined the NWC of the company
    as on a particular date
    • What is the minimum NWC and /or
    Margin Money to be maintained
    Working Capital Facilities
    Concept of Working Capital Funding
    MPBF

    LTA

    NWC
    FB facility CA
    NFB OCL

    22
    Fund Based Working Capital ( FBWC) assessment method

    FBWC

    Domestic Import Export


    Fund Based Working Capital ( FBWC) assessment method

    Domestic

    Operating Cash
    Turn over MPBF
    Cycle Budget
    method method
    method method
    Fund Based Working Capital ( FBWC) assessment method

    Turn over method Assessment


    Estimated Projected
    date

    1st July 2020 2020-21 2021-22

    Step 1 Estimate the turnover of estimated year Rs 500 lacs


    75 -105
    Step 2 Cash cycle from past data ( OC- CC ) ( days)
    Step 3 FBWC requirement ( 25% of Est. sales ) Rs 125 lacs

    Step 4 Minimum Margin Money for Working Rs 25 lacs

    Capital ( 5% of Est. Sales )


    Step 5 Estimated Margin Money for Working Capital
    Rs 30 lacs

    Step 6 Actual Margin Money for Working Capital as Rs 25 lacs

    On March 31st , 2020


    Step 7 Fund Based Working Capital Limit as per Rs 95 lacs

    Turn over method


    Is DP statement
    TO method applicable for Is Net Working Capital mandatory for TO method
    every entity ? relevant in TO method ? ?
    Fund Based Working Capital ( FBWC)
    assessment method: Case 1

    Actual sales for the FY 2019-20 : Rs 800 lacs


    Actual sales for the FY 2018-19 : Rs 1000 lacs
    Estimated sales for the FY 2020-21 : Rs 600 lacs
    Followings are details of Inventory , Receivable and Creditor amount ( Rs lacs )
    As on March 31st , 2020 :
    Raw Material : Rs 50 lacs ; WIP : Rs 10 lacs ; FG : Rs 100 lacs ;
    Receivable : Rs 100 lacs ; Creditor : Rs 50 lacs
    Cash Credit Outstanding as on March 31, 2020 was Rs 130 lacs
    What would be the fund based working capital limit for FY 2020-21 under
    Turn over method ?
    Fund Based Working Capital ( FBWC) assessment method

    Operating cycle method

    2020-21
    Step 1 Estimate the RM Cycle , WIP Cycle , FG Cycle and Receivable Cycle ( months )
    RM 1. WIP 0. FG 1. Recv.
    0 2
    Cycle Cycle 5 Cycle 5 Cycle

    Step 2 Estimate appropriate monthly cost ( Rs lacs )


    Consu 1 1 1 Gross 1
    0 COP COS
    mption 2 4 sales 8

    Step 3 Estimate amount of Working Capital Required ( Rs lacs )


    1 2 3
    RM 0 WIP 6 FG 1 Recv. 6
    73

    Step 4 Estimate margin money for each category of Current Asset ( % and Rs lacs )
    RM 2. WIP 1. FG 5.2 Recv. 14.4 23.65
    (25%) 5 5
    (25%) (25%) 5 (40%)

    Step 5 Estimate Creditor cycle and amount


    Per month No of 15
    1
    Creditor purchase month 1
    5
    ( Rs lacs ) LIMIT (
    Rs lacs 34.35
    )
    Fund Based Working Capital ( FBWC)
    assessment method: Case 2

    Actual sales for the FY 2019-20 : Rs 800 lacs


    Actual sales for the FY 2018-19 : Rs 1000 lacs
    Estimated sales for the FY 2020-21 : Rs 600 lacs
    Followings are estimates of Inventory , Receivable and Creditor amount ( Rs lacs )
    As on March 31st , 2021 :
    Raw Material : Rs 50 lacs ; WIP : Rs 10 lacs ; FG : Rs 100 lacs ;
    Receivable : Rs 100 lacs ; Creditor : Rs 50 lacs
    Margin for Inventory is 25% and Receivable is 40% .
    What would be the fund based working capital limit for FY 2020-21 under
    Operating Cycle method ?

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