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Usual question asked in any Credit Analyst interview. What's the best possible way to answer this question ? Members please share your expertise.
Although it might seem like a sophisticated question that requires a sophisticated answer, assessing a company's Working Capital needs is very simple according to a very simple equation:
Working Capital Gap = Sales - (Purchase + Inventory)
Simply put, If your Purchase + Inventory value exceeds your amount of Sales in any financial year, then you are running with a positive WC gap as more money is locked up than the amount expected to be received and vice versa.
The actual calculation of the gap requires another formula that assess the business cycle (Commonly Referred to as the Asset Conversion Cycle) by evaluating the number of Days it is required on the three steps mentioned in the first formula as follows:
Asset Conversion Cycle (ACC) Gap = Sales Days on Hand - (Purchases Days on Hand + Inventory days on Hand).
The resulting number of days is then associated with a monetary value per day to come up with the expected WC Gap.
For more information on how to use a "Direct Cash Flow" budget and assess the interim funding needs, you may wish to refer to www.yallabusiness.com
Any enterprise whether industrial, trading or other acquires two types of assets to run its business as has already been emphasised time and again. It requires fixed as
Any enterprise whether industrial, trading or other acquires two types of assets to run its business as has already been emphasised time and again. It requires fixed assets which are necessary for carrying on the production/business such as land and buildings, plant and machinery, furniture and fixtures etc. For a going concern these assets are of permanent nature and are not to be sold. The other types of assets required for day to day working of a unit are known as current assets which are floating in nature and keep changing during the course of business. It is these 'current assets' which are generally referred to as 'working capital'. We are by now already aware of the short‑term nature of these assets which are classified as current assets. It may be noted here that there may not be any fixed ratio between the fixed assets and floating assets for different projects as their requirement would differ depending upon the nature of project. Big industrial projects may require substantial investment in fixed assets and also large investment for working capital. The trading units may not require heavy investment in fixed assets while they may be carrying huge stocks in trade. The service units may hardly require any working capital and all investment may be blocked in creation of fixed assets.
A set financing pattern is evolved to meet the requirement of a unit for acquisition of fixed assets and current assets. Fixed assets are to be financed by owned funds and long‑term liabilities raised by a unit while current assets are partly financed by long‑term liabilities and partly by current liabilities and other short‑term loans arranged by the unit from the bank. The balance sheet of a unit under such dispensation may be represented as in next page.
The total current assets with the firm may be taken as gross working capital whereas the net working capital with the unit may be calculated as under:
Net Working Capital = Current Assets ‑ Current Liabilities
(NWC) (GWC) (including bank borrowings)
This net working capital is also sometimes referred to as 'liquid surplus' with the firm and has been margin available for working capital requirements of the unit. Financing of working capital has been the exclusive domain of commercial banks while they also grant term loans for creation of fixed assets either on their own or in consortium with State level/All India financial institutions. The financial institutions are also now considering sanction of working capital loans.
The current assets in the example given in the earlier paragraph are financed asunder:
Current Assets = Current liabilities + Working capital limits from banks + Margin from long‑term liabilities
Liabilities
Assets
Capital
Fixed Assets
Long-term liabilities
Margin NWC
Liquid Surplus
Working capital
limits from
banks
Current Assets
Current Liabilities
(Diagram 1)
This is the normal pattern of financing of current assets. However, a few units may be having a negative net working capital as shown below :
Liabilities
Assets
Capital
Long-term
Liabilities
Fixed Assets
Working capital deficit
Current
Liabilities
Current
Assets
(Diagram 2)
It is evident from diagram 2 that current liabilities are more than current assets and a part of short‑term funds (current liabilities) have been diverted to finance fixed assets. Not only that the unit is not able to provide any margin for working capital from its long‑term sources, but it is showing a net working capital deficit represented by the bracketed area in the diagram. This situation may not be considered as satisfactory and the unit is experiencing liquidity problems and has a current ratio of less than one. It may also be stated here that a large liquid surplus may also not reveal a very encouraging position, as it would mean idle funds or a lower turnover in working capital. It should, therefore, be the endeavour of every concern to ensure optimum utilisation of all the resources at its command and have just adequate liquid surplus.
The assessment of working capital may involve two aspects as under
• The level of current assets required to be held by any unit which is adequate for its day to day functioning, and
• The mode of financing of these current assets.
The value of inventory as given in the balance sheet is the position as on a particular day on which the balance sheet is drawn and may not be the actual average requirement of the unit. We will have to, therefore, evaluate the actual consumption pattern to arrive at a correct decision.
OPERATING CYCLE CONCEPT
The day to day business operations of a concern of any nature and, size involves many successive steps and final working results would depend on the effective combination of all these steps. The steps in general may include.:
· Acquisition and storage of raw material and other stores and spares required for manufacture of any product.
· Actual production process when the raw material is subjected to different processes to bring it to final shape of finished goods.
· Storage of finished goods awaiting sales.
· Sales of finished goods and realisations of sale proceeds.
All these steps put together form an operating cycle which can also be represented diagramatically as under :
Realisation Cash Raw Material
Stores & Spares
Bills Receivable/Sundry Semi‑Finished Goods
Debtors
Sales Finished Goods
We start from cash to buy raw material etc. and after completing all the steps end up with the cash. The intervening period required for completion of this entire process is the 'Operating Cycle'. The operating cycle may thus be defined as the intervening period from the time the goods or services enter the business till their realisation in cash. The study of this operating cycle is obviously very important as the actual requirement of the unit may be limited to the funds required to complete an operating cycle and the simplest formula for the working capital requirement may be represented as under:
Total working capital requirement = Total operating expenses expecting during the year
No. of operating cycles in a year
This system of calculation of working capital requirement is not in vogue as it only helps to assess the total requirement of a unit whereas the banks granting working capital limits would be interested in proper classification of its various components. The concept of operating cycle, however, throws light on various components of working capital required for the unit and these components may be classified as under:
· Raw material stores and spares consumed in the production process. The unit must have some stocks of these items for uninterrupted production.
· Manufacturing expenses such as wages, power and fuel etc. to be incurred during the process of manufacture.
· Stocks of work‑in‑process/semi finished goods maintained by the unit to complete an operating cycle.
· Stocks of finished goods awaiting sale. All the finished goods may not be immediately sold.
· Administrative and selling expenses during this process.
· Bills receivable/debtors for credit sales.
All or some of these components in varying proportions are required for any business.
Margin in relation to working capital has two concepts which need to be clearly understood. The one concept of providing margin by way of liquid surplus i.e. from long‑term liabilities has already been explained. It must be clear by now that current assets shall partly be financed by capital & long‑term liabilities for any going concern. This gains importance while fixing overall limits of working capital by the bank.
The other concept of margin as applicable to working capital limits is related to the value of security charged to the bank as cover for these limits. Financial accommodation up to 100% of the value of goods would not be granted by the banks and they would fix a certain margin on the value of security which must be provided by the borrower and the balance amount will be financed by the bank. The percentage of margin fixed on any security is dependent on its nature.
FORMAT FOR ASSESSMENT OF WORKING CAPITAL
In good old days when the banks were mainly adopting security-oriented approach in lending, no emphasis whatsoever was placed on assessment of limits as the credit decision was mainly based on the security available to cover the advance. The concept of assessment of working capital gained currency in early seventies and Reserve Bank of India proposed a scientific method for this purpose. A format that would be utilised for assessment of working capital was also prescribed. Various other formats and techniques for assessment have since been developed for different kinds of projects, the earlier format nevertheless is still in vogue and is made use of in all such cases where a specific method has not been prescribed. The proforma as prescribed by Reserve Bank of India is reproduced below :
………. months raw material requirements Rs.
………. Weeks’/months' consumable stores and spares Rs.
………. Weeks’ stocks in process at any one time Rs.
(average period of processing value of raw material
content in stock‑in process and manufacturing expenses
for the period of processing to be indicated)
………. Months’ finished goods at cost Rs.
………. Weeks’/months’ receivables representing credit sales Rs.
One months' manufacturing andadministrative expenses Rs.
________________
Total working capital requirement
Less Credit available on purchases and advance payments received . Rs.
Working capital in business or liquid surplus Rs.
________________
Net working capital requirements Rs. (A)
________________
Permissible Limits
Raw materials Rs.
Less Margin Rs. Rs.
Stock‑in‑process Rs.
Less Margin Rs. Rs.
Finished goods Rs.
Less: Margin Rs. Rs.
Receivables representing supplies to Govt. Rs.
Less Margin Rs. Rs.
Receivables representing supplies to sundry parties Rs.
Less Margin Rs. Rs.
_________________
Total limits Rs. (B)
__________________
Net working capital requirements (A) Rs.
Permissible limits (B) Rs.
Deficit, if any (A‑B) Rs.
.
It must, however, be noted that assessment of working capital is always done for future period, while the financial statements reveal the financial position of a concern as it was at some point of time in the past. If the calculations are based on the basis of the financial statements as on some previous date, the results derived may not be workable. Furthermore the newly established units may not provide any financial statements for the past period. The working capital is always to be assessed on tile basis of projections for the next year. The first most important point, therefore, is to make as accurate projections as possible for the next year. The projections submitted to the bank are very critically examined in relation to past performance of the unit, if any, future prospects and market for the ultimate product production capacity of the unit and general rate of inflation expected during the year. The projections given for the next year are, therefore, to be supported by convincing logic to stand scrutiny in the hands of the banker.
We shall now make an attempt to define various components of working capital as taken in the format and explain the most acceptable principles involved in calculating them for overall assessment of working capital.
I . …………………. months’ raw material requirements :
Every production unit will be required to maintain a minimum level of raw material in stock to ensure continuous production. The level of stock may differ from unit to unit and inter alia depends on nature of the raw material, its availability with particular emphasis on lead time involved in procuring it, price level, consumption pattern etc. From the past records, it is possible to find out the average stocking period of raw material with the following formula :
Average stocking period in months = Average stock of raw material
_____________________________________________
Average monthly consumption of raw material during the year
where
Average stock of raw material = Opening stock of raw material+ Closing stock of raw material
______________________________________________
2
Average monthly consumption of
raw material during the year = Opening stock of raw material + Total purchases of raw material‑ Closing stock of raw material of raw material
_________________________________________________________
12
The average stocking period thus arrived may be taken as the requirement of so many months of raw material for the unit and the estimated value of stocking of raw material required by the unit can thus be determined on the basis of projected figures.
In case of new units where figures of past performance are not available, storage period may have to be compared with storage period of such other units for the purpose of these calculations.
II …………………………. weeks/months’ stores and spares
The calculation for requirement of these items may be done in a similar manner as in case of raw materials. The average period of stocking required by the unit is generally, done on the basis of past performance. After determining the average period, the requirement is to be calculated on the basis of projected figures
III ………………………… weeks’ stocks in process
Stocks‑in‑process is an item representing goods remaining in semi‑finished form awaiting certain further processing before these can be finally converted to finished goods. The requirement of blockage of funds in these stocks will depend upon the processing period involved in the manufacturing. The processing period may differ from unit to unit and in case of new units it may have to be compared with existing units of similar nature.
Semi finished goods, however, possess another problem in evaluation. The value representing manufacturing expenses is added to the cost of raw material to determine the value of stocks in process. The value of stocks‑in‑process is thus related to the 'cost of production’ which may be calculated as under :
Cost of Production
(i) Raw material consumed Rs.
(ii) Other spares Rs.
(iii) Power and fuel Rs.
(iv) Wages Rs.
(v) Repairs and maintenance Rs.
(vi) Other manufacturing expenses Rs.
(vii) Depreciation Rs.
(viii) Sub‑total Rs.
[items (i) to items (vii)]
(ix) Add : Opening stocks in process Rs.
(x) Sub‑total [item (viii) plus item (ix)] Rs.
(xi) Deduct : Closing stocks in process Rs.
(xii) Cost of Production [item (x) minus item (xi)] Rs.
The average period of stocking of 'stocks in process' may nom calculated with the following formula :
Average period of stocking of = Average stock in process
stocks in process in days _____________________________
Daily cost of production
where
Average stock in process= Opening stock in process + Closing stock in process
2
Daily cost of production = Cost of production
365
Average stocking period which may also be taken as average processing period may thus be calculated from past records. The estimated requirements of the unit under this head may be related to its projected figures as in case of raw material etc. The calculation will, however, be based on the basis of cost of production which is the most acceptable principle of valuation of 'stocks‑in-process'.
IV . ………………………. month’s finished goods
The stocking period of finished goods may also be different for different types of units and will mainly depend upon the market conditions. The valuation of finished goods also possess a little problem and most accepted principle is for their valuation in terms of cost of sale which is calculated as under
Cost of sale = Opening stock of finished goods + Cost of production‑ Closing stocks of finished goods.
Cost of sale is also equal to net sales minus gross profit.
Average period of stocking of finished goods may be calculated with the help of the following formula:
Average period of stocking of finished goods in months = Average stock of finished goods
_________________________
Monthly cost of sales during the year
where,
Average stock of finished goods = Opening stock of finished goods +Closing stock of finished goods
___________________________________________________
2
and
Monthly cost of sales during the year = Cost of sales
___________
12
This period would give an indication as to the average period of stocking of finished goods by the unit on the basis of its past performance. This average period so found may now be related to the projected figures to find out the estimated requirement under this category. The finished goods will, however, be related to cost of sales while estimating the requirements.
V ………………. weeks/months’ receivables representing credit sales:
All the sales by any unit may not be against cash in which case the unit would not require any funds to be blocked under this head. A part of the sales might be effected on credit in which case the outstanding under debtors/bills receivable will form a part of total working capital required by the unit. The average period of blockage of funds under this head may also likewise be calculated with the following formula:
· Average period of credit in months = Average debtors
____________________ x 12
Total credit sales
· Average debtors =Opening balances Closing balance Opening balance of Closing balance
of debtors + of debtors bills receivable + of bills receivable
_________________________________ + __________________________
2 2
where the figures of credit sales are not separately available, we may take total sales figures in the denominator for the purpose of above calculation.
After determining the average period of credit sales, the requirement of the unit under this head may be related to the projected figures.
V1 ………………. One month’s manufacturing and administrative expenses
The unit has to meet the running, manufacturing and establishment expenses during the period of manufacture and necessary provision for funds required for this purpose is necessary. The monthly average expenditure can be determined by dividing total manufacturing and administrative expenditure during the last year by 12. Suitable adjustment in the anticipated expenditure for the next year may be necessary as per the projected figures.
The total of items No. I to VI is the requirement of the unit for working capital at the gross level. The unit raises resources to meet these requirements from many sources besides the liquid surplus already available with the unit The resources generally available at the command of the unit may be as under:
CREDIT AVAILABLE ON PURCHASES
All the goods may not be purchased by any unit against cash and the concern may avail credit for few purchases. The credit available from the market will reduce the requirement of the unit for working capital.
Creditors may be treated in the same manner as debtors while determining availability to the unit under this component. Average period of credit available to the unit may be determined according to the following formula:
· Average period of credit in months = Average creditors
_______________ x 12
Total credit purchases
· Average creditors =Opening balances Closing balance Opening balance of Closing balance
of creditors + of creditors bills payable + of bills payable
_________________________________ + __________________________
2 2
Where figures for credit purchases are not separately available, the figure of total purchases may be taken in the denominator for the purpose of the above calculations. After determining the average number of days for which credit is available, it should be possible to determine the average total credit available to the unit by relating it to the projected figures.
ADVANCE PAYMENT RECEIVED
Advance payment for sales may sometimes be received which means that additional funds are available with the unit there by reducing its working capital requirements. Any such advance payments that are received by the unit must be accounted for while determining the actual requirement.
LIQUID SURPLUS
The concept of liquid surplus has already been explained and it represents excess of current assets over current liabilities thereby meaning that some long-term liabilities have already been utilised by the unit for creation of current assets. This is also one concept of margin being provided by the unit for working capital as already explained.
Adjustments made in the gross working capital as already calculated for the above three items will give an idea of net working capital requirements of the unit which may be availed from the bank‑.
The banks may not be willing to finance all the components of working capital which have been taken into consideration for calculation of gross working capital requirements. The manufacturing and administrative expenses may not be financed by the bank. Banks also stipulate margin requirements, the other concept of margin, on the value of security of raw materials, semi finished and finished goods etc. while sanctioning the limits. Banks may be willing to finance sales operation by purchasing/discounting bills receivable and may not be very keen to finance 6ook debts or a very high margin may be stipulated for such advances. The following method is generally adopted by the banks for fixing limits on various components of working capital :
1. Raw Materials : Credit to the unit is generally available for purchase of raw material and the same is to be deducted while fixing credit limit against raw material. The margin applicable for raw material is low in comparison to the margin applicable for semi finished and finished goods. The margin ranging from 15 to 25% may be fixed depending upon the nature of the material and standing of the unit.
II. Stores and Spares : A small limit is granted against stores and spares and these are generally included as a part of raw material only for the purpose of calculating the credit limits. If a separate limit is sanctioned, it will be treated in the same manner as limit against raw materials.
III. Semi‑finished goods : Semi‑processed goods do not form a good security as its realisable value cannot be exactly determined. A higher margin upto 40% may be insisted upon by the bank while fixing a credit limit against stocks in process.
IV. Finished goods : The margin stipulated on finished goods may generally be higher than the margin on raw material and may be lower than that stipulated for stocks‑ in ‑process.
V. Bills receivable/book debts: Banks generally prefer to grant facilities against bills receivable and a very low or no margin may be stipulated for supplies to Government or other sundry parties. For finance against book debts margin stipulation may be as high as 50% and only a small limit may be permitted.
No bank advance is granted against manufacturing and administrative expenses which are to be borne by the unit itself. We have thus calculated the actual working capital requirements by the unit and also the limits sanctioned there against by the banks. Different considerations are involved while arriving at these figures and it may sometimes be possible that limits sanctioned by the bank are not adequate and are not equal to the total working capital requirements. The unit has to investigate as to the reasons for such happening and has to take corrective steps, if possible or to bring in more funds in the business to correct the situation.
We have made detailed analysis of the balance sheet of a company in Appendix 14.1 given at the end of chapter 14 and will now attempt to assess the working capital of the unit on the basis of above discussion. It may, however, be mentioned even at the sake of repetition that in actual practice assessment is done on the basis of projected figures of sales for the next year. In this exercise also we have presumed a uniform increase of about 10% in all the figures for the next year.
(All figures are taken in Rupees in lakhs.)
I . raw material requirement:
(Figures available in Schedule H)
· Average stock of = Opening balance of raw material + Closing stock of raw material
raw material ___________________________________________________
= 458.23 +652.77
2
= 555.50
· Average monthly
consumption of raw
material during the year = Opening stock of raw material + Total purchase ‑ Closing stock of raw material
12
= 458.23 + 3364.63 – 652.77
12
= 264.17 per month
· Average stocking period in months = Average stock of raw material
__________________________________
Average monthly consumption of R.M.
= 550.50
264.17
= 2.1 months (app.)
2.1 months is thus the average stocking period for raw material by the unit. Presuming the same level of production but anticipating a general increase of 10% in all factors of production due to inflation and other such reasons the raw material requirement of the unit will thus be worked out as under:
2.1 months’ requirement of raw material
= 2.1 x 290.58 = 610.22
II……………week's/months' stores and spares :
· Average stock of stores and spares = 9.93 +7.85
2
= 17.78
2
= 8.89
Average monthly consumption figures are not available and the requirement of the unit against stores and spares may be taken as equivalent to Rs. 10 lacs after providing necessary increase of about 10% as already discussed.
III . ………….weeks’ stocks in process:
· Cost of production = 3,932.82
· Weekly cost of production = 3,932.82
52
= 75.63
· Average stocks in process = 188.92+215.08
2
= 202
· Average period of process = Average stock in process
Weekly cost of production
= 202 x 52
3932.82
= 2.68 weeks
The requirement of the unit for stock in process after providing the 10% increase over the last year figures would amount to
2.68weeks stocks in process i.e., cost of production
= 2.68 x 4326.1
52
= 222.96
IV ……………. months’ finished goods:
· Cost of sale = Opening stock of finished goods + Cost of production‑ Closing stocks of finished goods.
= 385.73 + 3,932.82 ‑ 483.92 = 3,834.63
· Average stocks of finished goods = Opening stock of Finished goods+ Closing stocks of finished goods
2
= 385.73 + 483.92
2
= 434.82
· Average period of stocking of
finished goods in months = Average stocks of finished goods
Cost of Sales
= 434.82 x 12
3843.63
= 1.36months.
After providing 10% increase under this factor also the requirement of the unit under this component would be
1.36months' of finished goods i.e., cost of sale = 1.36 x 4,218.09
12
= 478.05
V…………weeks/months bill Receivable representing credit sale
The figures of opening balance of bills receivable/debtors are not given and the figures as per the balance sheet only is taken to find out the requirement of the unit. The figures of credit sales are also not separately given and hence figures of total sales are taken for this purpose:
Average period of credit in months = Average Debtors
Sales
= 738.7 12
4832.57
=1.83
The requirement of the unit for bills receivable and debtors will now be computed as under:
1.83 months of bills receivable of sales after providing projected increase of 10 %.
= 1.83 x 5,315.82
12
= 812.56
VI. ……………….. One month's manufacturing and administrative expenses
· Total operating expenses = 1211.32
· Expenses for one month = 1211.32
12
= 100.94
· Anticipated expenses in the next you
after providing for 10% increase = 111.00
CREDIT AVAILABLE FOR PURCHASE
Figures of opening balances under creditors are not given and necessary calculations are made on the same basis as in case of sundry debtors.
· Average period of credit available = Average Creditors x 12
in months Purchases
= 394.85 x 12
3364.63
· Credit available for purchases to the unit= 1.41 month
1.41 months of credit after providing
projected increase of 10% = 1.41 x 3701.09
12
= 434.33
We may now proceed to compute the total working capital requirements for the unit as under :
Working capital requirements Rs. in lacs
2.1 months requirements of raw materials 610.22
‑ months requirement of stores and spares 10.00
2.68 weeks requirement of‑stocks in process 222.96
1.36 months’ of finished goods 478.05
1.83 months’ of bills receivable & sundry debtors 812.56
1 month’s manufacturing and administrative expenses 111.00
__________
Total requirement 2244.79
__________
Less :
Credit available on purchases and advance payments received 434.33
Liquid surplus/net working capital available in business
(Current Assets ‑ Current Liabilities) 200.98
(After making adjustment for 10% increase)
____________
Net working capital requirements (A)1609.48
_____________
Permissible Bank Limits
Raw material 610.22
Less credit available 434.33
175.89
Less margin @ 25% 43.97
____________ 131.92
Stock in process 222.96
Less margin @ 40% 89.18
133.78
Finished goods 478.05
Less margin @ 30% 143.41
_____________
334.64
Receivable
Book debts ‑ 412.56
Margin @ 50% 206.28
Bills Receivables ‑ 400
Margin – Nil 400.00
_____________
606.28
_______________
Total Limits (B) 1206.62
_____________
Net working capital requirement 1609.48
Permissible bank limits 1206.62
Deficit = 1609.48 ‑ 1206.62
= 402.86
The unit is now faced with a deficit of Rs. 402.86 lacs in working capital and the various options available to the unit to meet this deficit may be as follows :
· To arrange for additional capital to that extent to wipe off the deficit.
· To arrange for long‑term loans/deposits to strengthen the long‑term resources of the unit to provide necessary margin for working capital.
· To critically examine the level of current assets held by the unit. It may be possible that the unit may be able to work with lower inventory and may make some earnest efforts to quickly realise its debtors thereby reducing the level of working capital requirements of the unit itself.
· To negotiate with the bank to reduce margin requirements so that additional limits are available thereby reducing the deficit.
A package measure consisting of one or all of these steps is necessary to improve the working condition of the unit so that it is not starved of the working capital.
The format as suggested by Reserve Bank of India has been the first attempt to assess the working capital requirement of industrial units on a scientific basis. The format has been duly amended for smaller units by Puri Committee. The assessment of requirements of borrowers covered under various segments of priority sectors is done on different consideration and standard forms and procedure have been developed for this purpose.
A new dimension to financing of working capital by banks was given by Reserve Bank of India in 1975 by accepting the recommendations of 'Tandon Committee' which were later modified by ‘Chore Committee’. These recommendations were applicable for large advances enjoying working capital limits of Rs. 50.00 lacs and above. Reserve Bank of India also prescribed a standard format for assessment of working capital limits for accounts covered under 'Credit Authorisation Scheme' later on renamed as, ‘Credit Monitoring Arrangement’1. This form has, however, been adopted by many of the banks for assessment of limits for working capital advances exceeding Rs. 10.00 lacs.
Different forms adopting different techniques are thus in circulation for assessment of working capital depending upon the size and category of projects as under:
(i) Form for assessment of requirements of SSI units upto credit limits of Rs. 2,00,000/‑ (including composite loans)
(ii) Form for assessment of requirements of SSI units for credit limits of above Rs. 2,00,000 and upto Rs. 15.00 lacs
(iii) Form for assessment of requirements for units with credit limits above Rs. 15.00 lacs and upto Rs. 1.00 crore
(iv) Form for assessment of requirements for units with credit limits above Rs. 1.00 crore.
(v) CMA Data form for assessment of requirements for units with credit limits above Rs. 10.00 lacs or as per the cut off point fixed by individual banks.
(vi) Assessment of limits for projects falling under various segments of priority sector.
The format at (v) has been discussed in chapter 17 on ‘New System of Reporting and Loan System for Delivery of Bank Credit’.
It may, however, be added here that assessment of working capital will basically involve all these factors in all the methods and though this format might have been replaced by other forms, yet its importance hardly needs any emphasis as will be proved in subsequent discussions.
sets which are necessary for carrying on the production/business such as land and buildings, plant and machinery, furniture and fixtures etc. For a going concern these assets are of permanent nature and are not to be sold. The other types of assets required for day to day working of a unit are known as current assets which are floating in nature and keep changing during the course of business. It is these 'current assets' which are generally referred to as 'working capital'. We are by now already aware of the short‑term nature of these assets which are classified as current assets. It may be noted here that there may not be any fixed ratio between the fixed assets and floating assets for different projects as their requirement would differ depending upon the nature of project. Big industrial projects may require substantial investment in fixed assets and also large investment for working capital. The trading units may not require heavy investment in fixed assets while they may be carrying huge stocks in trade. The service units may hardly require any working capital and all investment may be blocked in creation of fixed assets.
A set financing pattern is evolved to meet the requirement of a unit for acquisition of fixed assets and current assets. Fixed assets are to be financed by owned funds and long‑term liabilities raised by a unit while current assets are partly financed by long‑term liabilities and partly by current liabilities and other short‑term loans arranged by the unit from the bank. The balance sheet of a unit under such dispensation may be represented as in next page.
The total current assets with the firm may be taken as gross working capital whereas the net working capital with the unit may be calculated as under:
Net Working Capital = Current Assets ‑ Current Liabilities
(NWC) (GWC) (including bank borrowings)
This net working capital is also sometimes referred to as 'liquid surplus' with the firm and has been margin available for working capital requirements of the unit. Financing of working capital has been the exclusive domain of commercial banks while they also grant term loans for creation of fixed assets either on their own or in consortium with State level/All India financial institutions. The financial institutions are also now considering sanction of working capital loans.
The current assets in the example given in the earlier paragraph are financed asunder:
Current Assets = Current liabilities + Working capital limits from banks + Margin from long‑term liabilities
Liabilities
Assets
Capital
Fixed Assets
Long-term liabilities
Margin NWC
Liquid Surplus
Working capital
limits from
banks
Current Assets
Current Liabilities
(Diagram 1)
This is the normal pattern of financing of current assets. However, a few units may be having a negative net working capital as shown below :
Liabilities
Assets
Capital
Long-term
Liabilities
Fixed Assets
Working capital deficit
Current
Liabilities
Current
Assets
(Diagram 2)
It is evident from diagram 2 that current liabilities are more than current assets and a part of short‑term funds (current liabilities) have been diverted to finance fixed assets. Not only that the unit is not able to provide any margin for working capital from its long‑term sources, but it is showing a net working capital deficit represented by the bracketed area in the diagram. This situation may not be considered as satisfactory and the unit is experiencing liquidity problems and has a current ratio of less than one. It may also be stated here that a large liquid surplus may also not reveal a very encouraging position, as it would mean idle funds or a lower turnover in working capital. It should, therefore, be the endeavour of every concern to ensure optimum utilisation of all the resources at its command and have just adequate liquid surplus.
The assessment of working capital may involve two aspects as under
• The level of current assets required to be held by any unit which is adequate for its day to day functioning, and
• The mode of financing of these current assets.
The value of inventory as given in the balance sheet is the position as on a particular day on which the balance sheet is drawn and may not be the actual average requirement of the unit. We will have to, therefore, evaluate the actual consumption pattern to arrive at a correct decision.
OPERATING CYCLE CONCEPT
The day to day business operations of a concern of any nature and, size involves many successive steps and final working results would depend on the effective combination of all these steps. The steps in general may include.:
· Acquisition and storage of raw material and other stores and spares required for manufacture of any product.
· Actual production process when the raw material is subjected to different processes to bring it to final shape of finished goods.
· Storage of finished goods awaiting sales.
· Sales of finished goods and realisations of sale proceeds.
All these steps put together form an operating cycle which can also be represented diagramatically as under :
Realisation Cash Raw Material
Stores & Spares
Bills Receivable/Sundry Semi‑Finished Goods
Debtors
Sales Finished Goods
We start from cash to buy raw material etc. and after completing all the steps end up with the cash. The intervening period required for completion of this entire process is the 'Operating Cycle'. The operating cycle may thus be defined as the intervening period from the time the goods or services enter the business till their realisation in cash. The study of this operating cycle is obviously very important as the actual requirement of the unit may be limited to the funds required to complete an operating cycle and the simplest formula for the working capital requirement may be represented as under:
Total working capital requirement = Total operating expenses expecting during the year
No. of operating cycles in a year
This system of calculation of working capital requirement is not in vogue as it only helps to assess the total requirement of a unit whereas the banks granting working capital limits would be interested in proper classification of its various components. The concept of operating cycle, however, throws light on various components of working capital required for the unit and these components may be classified as under:
· Raw material stores and spares consumed in the production process. The unit must have some stocks of these items for uninterrupted production.
· Manufacturing expenses such as wages, power and fuel etc. to be incurred during the process of manufacture.
· Stocks of work‑in‑process/semi finished goods maintained by the unit to complete an operating cycle.
· Stocks of finished goods awaiting sale. All the finished goods may not be immediately sold.
· Administrative and selling expenses during this process.
· Bills receivable/debtors for credit sales.
All or some of these components in varying proportions are required for any business.
Margin in relation to working capital has two concepts which need to be clearly understood. The one concept of providing margin by way of liquid surplus i.e. from long‑term liabilities has already been explained. It must be clear by now that current assets shall partly be financed by capital & long‑term liabilities for any going concern. This gains importance while fixing overall limits of working capital by the bank.
The other concept of margin as applicable to working capital limits is related to the value of security charged to the bank as cover for these limits. Financial accommodation up to 100% of the value of goods would not be granted by the banks and they would fix a certain margin on the value of security which must be provided by the borrower and the balance amount will be financed by the bank. The percentage of margin fixed on any security is dependent on its nature.
FORMAT FOR ASSESSMENT OF WORKING CAPITAL
In good old days when the banks were mainly adopting security-oriented approach in lending, no emphasis whatsoever was placed on assessment of limits as the credit decision was mainly based on the security available to cover the advance. The concept of assessment of working capital gained currency in early seventies and Reserve Bank of India proposed a scientific method for this purpose. A format that would be utilised for assessment of working capital was also prescribed. Various other formats and techniques for assessment have since been developed for different kinds of projects, the earlier format nevertheless is still in vogue and is made use of in all such cases where a specific method has not been prescribed. The proforma as prescribed by Reserve Bank of India is reproduced below :
………. months raw material requirements Rs.
………. Weeks’/months' consumable stores and spares Rs.
………. Weeks’ stocks in process at any one time Rs.
(average period of processing value of raw material
content in stock‑in process and manufacturing expenses
for the period of processing to be indicated)
………. Months’ finished goods at cost Rs.
………. Weeks’/months’ receivables representing credit sales Rs.
One months' manufacturing andadministrative expenses Rs.
________________
Total working capital requirement
Less Credit available on purchases and advance payments received . Rs.
Working capital in business or liquid surplus Rs.
________________
Net working capital requirements Rs. (A)
________________
Permissible Limits
Raw materials Rs.
Less Margin Rs. Rs.
Stock‑in‑process Rs.
Less Margin Rs. Rs.
Finished goods Rs.
Less: Margin Rs. Rs.
Receivables representing supplies to Govt. Rs.
Less Margin Rs. Rs.
Receivables representing supplies to sundry parties Rs.
Less Margin Rs. Rs.
_________________
Total limits Rs. (B)
__________________
Net working capital requirements (A) Rs.
Permissible limits (B) Rs.
Deficit, if any (A‑B) Rs.
.
It must, however, be noted that assessment of working capital is always done for future period, while the financial statements reveal the financial position of a concern as it was at some point of time in the past. If the calculations are based on the basis of the financial statements as on some previous date, the results derived may not be workable. Furthermore the newly established units may not provide any financial statements for the past period. The working capital is always to be assessed on tile basis of projections for the next year. The first most important point, therefore, is to make as accurate projections as possible for the next year. The projections submitted to the bank are very critically examined in relation to past performance of the unit, if any, future prospects and market for the ultimate product production capacity of the unit and general rate of inflation expected during the year. The projections given for the next year are, therefore, to be supported by convincing logic to stand scrutiny in the hands of the banker.
We shall now make an attempt to define various components of working capital as taken in the format and explain the most acceptable principles involved in calculating them for overall assessment of working capital.
I . …………………. months’ raw material requirements :
Every production unit will be required to maintain a minimum level of raw material in stock to ensure continuous production. The level of stock may differ from unit to unit and inter alia depends on nature of the raw material, its availability with particular emphasis on lead time involved in procuring it, price level, consumption pattern etc. From the past records, it is possible to find out the average stocking period of raw material with the following formula :
Average stocking period in months = Average stock of raw material
_____________________________________________
Average monthly consumption of raw material during the year
where
Average stock of raw material = Opening stock of raw material+ Closing stock of raw material
______________________________________________
2
Average monthly consumption of
raw material during the year = Opening stock of raw material + Total purchases of raw material‑ Closing stock of raw material of raw material
_________________________________________________________
12
The average stocking period thus arrived may be taken as the requirement of so many months of raw material for the unit and the estimated value of stocking of raw material required by the unit can thus be determined on the basis of projected figures.
In case of new units where figures of past performance are not available, storage period may have to be compared with storage period of such other units for the purpose of these calculations.
II …………………………. weeks/months’ stores and spares
The calculation for requirement of these items may be done in a similar manner as in case of raw materials. The average period of stocking required by the unit is generally, done on the basis of past performance. After determining the average period, the requirement is to be calculated on the basis of projected figures
III ………………………… weeks’ stocks in process
Stocks‑in‑process is an item representing goods remaining in semi‑finished form awaiting certain further processing before these can be finally converted to finished goods. The requirement of blockage of funds in these stocks will depend upon the processing period involved in the manufacturing. The processing period may differ from unit to unit and in case of new units it may have to be compared with existing units of similar nature.
Semi finished goods, however, possess another problem in evaluation. The value representing manufacturing expenses is added to the cost of raw material to determine the value of stocks in process. The value of stocks‑in‑process is thus related to the 'cost of production’ which may be calculated as under :
Cost of Production
(i) Raw material consumed Rs.
(ii) Other spares Rs.
(iii) Power and fuel Rs.
(iv) Wages Rs.
(v) Repairs and maintenance Rs.
(vi) Other manufacturing expenses Rs.
(vii) Depreciation Rs.
(viii) Sub‑total Rs.
[items (i) to items (vii)]
(ix) Add : Opening stocks in process Rs.
(x) Sub‑total [item (viii) plus item (ix)] Rs.
(xi) Deduct : Closing stocks in process Rs.
(xii) Cost of Production [item (x) minus item (xi)] Rs.
The average period of stocking of 'stocks in process' may nom calculated with the following formula :
Average period of stocking of = Average stock in process
stocks in process in days _____________________________
Daily cost of production
where
Average stock in process= Opening stock in process + Closing stock in process
2
Daily cost of production = Cost of production
365
Average stocking period which may also be taken as average processing period may thus be calculated from past records. The estimated requirements of the unit under this head may be related to its projected figures as in case of raw material etc. The calculation will, however, be based on the basis of cost of production which is the most acceptable principle of valuation of 'stocks‑in-process'.
IV . ………………………. month’s finished goods
The stocking period of finished goods may also be different for different types of units and will mainly depend upon the market conditions. The valuation of finished goods also possess a little problem and most accepted principle is for their valuation in terms of cost of sale which is calculated as under
Cost of sale = Opening stock of finished goods + Cost of production‑ Closing stocks of finished goods.
Cost of sale is also equal to net sales minus gross profit.
Average period of stocking of finished goods may be calculated with the help of the following formula:
Average period of stocking of finished goods in months = Average stock of finished goods
_________________________
Monthly cost of sales during the year
where,
Average stock of finished goods = Opening stock of finished goods +Closing stock of finished goods
___________________________________________________
2
and
Monthly cost of sales during the year = Cost of sales
___________
12
This period would give an indication as to the average period of stocking of finished goods by the unit on the basis of its past performance. This average period so found may now be related to the projected figures to find out the estimated requirement under this category. The finished goods will, however, be related to cost of sales while estimating the requirements.
V ………………. weeks/months’ receivables representing credit sales:
All the sales by any unit may not be against cash in which case the unit would not require any funds to be blocked under this head. A part of the sales might be effected on credit in which case the outstanding under debtors/bills receivable will form a part of total working capital required by the unit. The average period of blockage of funds under this head may also likewise be calculated with the following formula:
· Average period of credit in months = Average debtors
____________________ x 12
Total credit sales
· Average debtors =Opening balances Closing balance Opening balance of Closing balance
of debtors + of debtors bills receivable + of bills receivable
_________________________________ + __________________________
2 2
where the figures of credit sales are not separately available, we may take total sales figures in the denominator for the purpose of above calculation.
After determining the average period of credit sales, the requirement of the unit under this head may be related to the projected figures.
V1 ………………. One month’s manufacturing and administrative expenses
The unit has to meet the running, manufacturing and establishment expenses during the period of manufacture and necessary provision for funds required for this purpose is necessary. The monthly average expenditure can be determined by dividing total manufacturing and administrative expenditure during the last year by 12. Suitable adjustment in the anticipated expenditure for the next year may be necessary as per the projected figures.
The total of items No. I to VI is the requirement of the unit for working capital at the gross level. The unit raises resources to meet these requirements from many sources besides the liquid surplus already available with the unit The resources generally available at the command of the unit may be as under:
CREDIT AVAILABLE ON PURCHASES
All the goods may not be purchased by any unit against cash and the concern may avail credit for few purchases. The credit available from the market will reduce the requirement of the unit for working capital.
Creditors may be treated in the same manner as debtors while determining availability to the unit under this component. Average period of credit available to the unit may be determined according to the following formula:
· Average period of credit in months = Average creditors
_______________ x 12
Total credit purchases
· Average creditors =Opening balances Closing balance Opening balance of Closing balance
of creditors + of creditors bills payable + of bills payable
_________________________________ + __________________________
2 2
Where figures for credit purchases are not separately available, the figure of total purchases may be taken in the denominator for the purpose of the above calculations. After determining the average number of days for which credit is available, it should be possible to determine the average total credit available to the unit by relating it to the projected figures.
ADVANCE PAYMENT RECEIVED
Advance payment for sales may sometimes be received which means that additional funds are available with the unit there by reducing its working capital requirements. Any such advance payments that are received by the unit must be accounted for while determining the actual requirement.
LIQUID SURPLUS
The concept of liquid surplus has already been explained and it represents excess of current assets over current liabilities thereby meaning that some long-term liabilities have already been utilised by the unit for creation of current assets. This is also one concept of margin being provided by the unit for working capital as already explained.
Adjustments made in the gross working capital as already calculated for the above three items will give an idea of net working capital requirements of the unit which may be availed from the bank‑.
The banks may not be willing to finance all the components of working capital which have been taken into consideration for calculation of gross working capital requirements. The manufacturing and administrative expenses may not be financed by the bank. Banks also stipulate margin requirements, the other concept of margin, on the value of security of raw materials, semi finished and finished goods etc. while sanctioning the limits. Banks may be willing to finance sales operation by purchasing/discounting bills receivable and may not be very keen to finance 6ook debts or a very high margin may be stipulated for such advances. The following method is generally adopted by the banks for fixing limits on various components of working capital :
1. Raw Materials : Credit to the unit is generally available for purchase of raw material and the same is to be deducted while fixing credit limit against raw material. The margin applicable for raw material is low in comparison to the margin applicable for semi finished and finished goods. The margin ranging from 15 to 25% may be fixed depending upon the nature of the material and standing of the unit.
II. Stores and Spares : A small limit is granted against stores and spares and these are generally included as a part of raw material only for the purpose of calculating the credit limits. If a separate limit is sanctioned, it will be treated in the same manner as limit against raw materials.
III. Semi‑finished goods : Semi‑processed goods do not form a good security as its realisable value cannot be exactly determined. A higher margin upto 40% may be insisted upon by the bank while fixing a credit limit against stocks in process.
IV. Finished goods : The margin stipulated on finished goods may generally be higher than the margin on raw material and may be lower than that stipulated for stocks‑ in ‑process.
V. Bills receivable/book debts: Banks generally prefer to grant facilities against bills receivable and a very low or no margin may be stipulated for supplies to Government or other sundry parties. For finance against book debts margin stipulation may be as high as 50% and only a small limit may be permitted.
No bank advance is granted against manufacturing and administrative expenses which are to be borne by the unit itself. We have thus calculated the actual working capital requirements by the unit and also the limits sanctioned there against by the banks. Different considerations are involved while arriving at these figures and it may sometimes be possible that limits sanctioned by the bank are not adequate and are not equal to the total working capital requirements. The unit has to investigate as to the reasons for such happening and has to take corrective steps, if possible or to bring in more funds in the business to correct the situation.
We have made detailed analysis of the balance sheet of a company in Appendix 14.1 given at the end of chapter 14 and will now attempt to assess the working capital of the unit on the basis of above discussion. It may, however, be mentioned even at the sake of repetition that in actual practice assessment is done on the basis of projected figures of sales for the next year. In this exercise also we have presumed a uniform increase of about 10% in all the figures for the next year.
(All figures are taken in Rupees in lakhs.)
I . raw material requirement:
(Figures available in Schedule H)
· Average stock of = Opening balance of raw material + Closing stock of raw material
raw material ___________________________________________________
= 458.23 +652.77
2
= 555.50
· Average monthly
consumption of raw
material during the year = Opening stock of raw material + Total purchase ‑ Closing stock of raw material
12
= 458.23 + 3364.63 – 652.77
12
= 264.17 per month
· Average stocking period in months = Average stock of raw material
__________________________________
Average monthly consumption of R.M.
= 550.50
264.17
= 2.1 months (app.)
2.1 months is thus the average stocking period for raw material by the unit. Presuming the same level of production but anticipating a general increase of 10% in all factors of production due to inflation and other such reasons the raw material requirement of the unit will thus be worked out as under:
2.1 months’ requirement of raw material
= 2.1 x 290.58 = 610.22
II……………week's/months' stores and spares :
· Average stock of stores and spares = 9.93 +7.85
2
= 17.78
2
= 8.89
Average monthly consumption figures are not available and the requirement of the unit against stores and spares may be taken as equivalent to Rs. 10 lacs after providing necessary increase of about 10% as already discussed.
III . ………….weeks’ stocks in process:
· Cost of production = 3,932.82
· Weekly cost of production = 3,932.82
52
= 75.63
· Average stocks in process = 188.92+215.08
2
= 202
· Average period of process = Average stock in process
Weekly cost of production
= 202 x 52
3932.82
= 2.68 weeks
The requirement of the unit for stock in process after providing the 10% increase over the last year figures would amount to
2.68weeks stocks in process i.e., cost of production
= 2.68 x 4326.1
52
= 222.96
IV ……………. months’ finished goods:
· Cost of sale = Opening stock of finished goods + Cost of production‑ Closing stocks of finished goods.
= 385.73 + 3,932.82 ‑ 483.92 = 3,834.63
· Average stocks of finished goods = Opening stock of Finished goods+ Closing stocks of finished goods
2
= 385.73 + 483.92
2
= 434.82
· Average period of stocking of
finished goods in months = Average stocks of finished goods
Cost of Sales
= 434.82 x 12
3843.63
= 1.36months.
After providing 10% increase under this factor also the requirement of the unit under this component would be
1.36months' of finished goods i.e., cost of sale = 1.36 x 4,218.09
12
= 478.05
V…………weeks/months bill Receivable representing credit sale
The figures of opening balance of bills receivable/debtors are not given and the figures as per the balance sheet only is taken to find out the requirement of the unit. The figures of credit sales are also not separately given and hence figures of total sales are taken for this purpose:
Average period of credit in months = Average Debtors
Sales
= 738.7 12
4832.57
=1.83
The requirement of the unit for bills receivable and debtors will now be computed as under:
1.83 months of bills receivable of sales after providing projected increase of 10 %.
= 1.83 x 5,315.82
12
= 812.56
VI. ……………….. One month's manufacturing and administrative expenses
· Total operating expenses = 1211.32
· Expenses for one month = 1211.32
12
= 100.94
· Anticipated expenses in the next you
after providing for 10% increase = 111.00
CREDIT AVAILABLE FOR PURCHASE
Figures of opening balances under creditors are not given and necessary calculations are made on the same basis as in case of sundry debtors.
· Average period of credit available = Average Creditors x 12
in months Purchases
= 394.85 x 12
3364.63
· Credit available for purchases to the unit= 1.41 month
1.41 months of credit after providing
projected increase of 10% = 1.41 x 3701.09
12
= 434.33
We may now proceed to compute the total working capital requirements for the unit as under :
Working capital requirements Rs. in lacs
2.1 months requirements of raw materials 610.22
‑ months requirement of stores and spares 10.00
2.68 weeks requirement of‑stocks in process 222.96
1.36 months’ of finished goods 478.05
1.83 months’ of bills receivable & sundry debtors 812.56
1 month’s manufacturing and administrative expenses 111.00
__________
Total requirement 2244.79
__________
Less :
Credit available on purchases and advance payments received 434.33
Liquid surplus/net working capital available in business
(Current Assets ‑ Current Liabilities) 200.98
(After making adjustment for 10% increase)
____________
Net working capital requirements (A)1609.48
_____________
Permissible Bank Limits
Raw material 610.22
Less credit available 434.33
175.89
Less margin @ 25% 43.97
____________ 131.92
Stock in process 222.96
Less margin @ 40% 89.18
133.78
Finished goods 478.05
Less margin @ 30% 143.41
_____________
334.64
Receivable
Book debts ‑ 412.56
Margin @ 50% 206.28
Bills Receivables ‑ 400
Margin – Nil 400.00
_____________
606.28
_______________
Total Limits (B) 1206.62
_____________
Net working capital requirement 1609.48
Permissible bank limits 1206.62
Deficit = 1609.48 ‑ 1206.62
= 402.86
The unit is now faced with a deficit of Rs. 402.86 lacs in working capital and the various options available to the unit to meet this deficit may be as follows :
· To arrange for additional capital to that extent to wipe off the deficit.
· To arrange for long‑term loans/deposits to strengthen the long‑term resources of the unit to provide necessary margin for working capital.
· To critically examine the level of current assets held by the unit. It may be possible that the unit may be able to work with lower inventory and may make some earnest efforts to quickly realise its debtors thereby reducing the level of working capital requirements of the unit itself.
· To negotiate with the bank to reduce margin requirements so that additional limits are available thereby reducing the deficit.
A package measure consisting of one or all of these steps is necessary to improve the working condition of the unit so that it is not starved of the working capital.
The format as suggested by Reserve Bank of India has been the first attempt to assess the working capital requirement of industrial units on a scientific basis. The format has been duly amended for smaller units by Puri Committee. The assessment of requirements of borrowers covered under various segments of priority sectors is done on different consideration and standard forms and procedure have been developed for this purpose.
A new dimension to financing of working capital by banks was given by Reserve Bank of India in 1975 by accepting the recommendations of 'Tandon Committee' which were later modified by ‘Chore Committee’. These recommendations were applicable for large advances enjoying working capital limits of Rs. 50.00 lacs and above. Reserve Bank of India also prescribed a standard format for assessment of working capital limits for accounts covered under 'Credit Authorisation Scheme' later on renamed as, ‘Credit Monitoring Arrangement’1. This form has, however, been adopted by many of the banks for assessment of limits for working capital advances exceeding Rs. 10.00 lacs.
Different forms adopting different techniques are thus in circulation for assessment of working capital depending upon the size and category of projects as under:
(i) Form for assessment of requirements of SSI units upto credit limits of Rs. 2,00,000/‑ (including composite loans)
(ii) Form for assessment of requirements of SSI units for credit limits of above Rs. 2,00,000 and upto Rs. 15.00 lacs
(iii) Form for assessment of requirements for units with credit limits above Rs. 15.00 lacs and upto Rs. 1.00 crore
(iv) Form for assessment of requirements for units with credit limits above Rs. 1.00 crore.
(v) CMA Data form for assessment of requirements for units with credit limits above Rs. 10.00 lacs or as per the cut off point fixed by individual banks.
(vi) Assessment of limits for projects falling under various segments of priority sector.
The format at (v) has been discussed in chapter 17 on ‘New System of Reporting and Loan System for Delivery of Bank Credit’.
It may, however, be added here that assessment of working capital will basically involve all these factors in all the methods and though this format might have been replaced by other forms, yet its importance hardly needs any emphasis as will be proved in subsequent discussions.
