Methods of Working Capital Assessment

Methods of Working capital assessment 

• Operating Cycle Method
• Drawing Power Method.

• Turnover Method.
• MPBF method (II method of lending) for limits of Rs 6.00 crores and above
• Cash Budget method  -  Based on procurement and cash inflow) . It is mainly used for Seasonal Industries (Sugar/ Rice Mills/Textiles/Tea/Tobacco/Fertilizers)  Contractors & Real Estate Developers , Educational Institutions, etc.

Operating Cycle Method

Meaning of  operating cycle:

It begins with acquisition of raw materials and ends with collection of receivables.

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)

Example of Operating Cycle:

Length of operating Cycle:

1. Procurement of raw material : 30 days
2. Conversion/process time : 15 days
3. Average time of holding of finished goods: 15 days
4. Average collection period : 30 days
5. Total operating cycle : 90 days
6. Operating cycle in a year : 4
7. Total operating expenses per annum : Rs.60 lacs
8. Total turnover per annum : Rs.70 lacs
9. Working capital requirement : 60/4= 15 lacs

Drawing Power (DP) Method :
(for units with small limits)

Drawing power is arrived at  on the basis of valuation of current assets charged to  the bank in the shape  of hypothecation and  assignment , after deducting the  stipulated margin

Illustration:

Paid stock – 4   Margin 25% - DP  = 3