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Before explaining the working capital finance in Food Processing Industries, we are
here with briefly explained the concept and methods of working capital finance
adopted by Indian Banks .
A. CONCEPT OF WORKING CAPITAL FINANCE:
1. Working capital means the sum total of funds required for continuous
operation of a business / manufacturing unit on an ongoing basis. It
represents the funds invested in an enterprise to keep its operations
moving without any stoppage or dislocation.
2. An industrial concern has to procure raw materials for processing, pay
for energy / power / fuel, pay wages and other manufacturing expenses
store finished goods before marketing and grant credit to its customers.
Likewise, a business / trading concern needs finance for stocking goods,
paying wages, overheads etc., and providing credit to its customers.
Similarly, a concern engaged in providing services needs finance to pay
wages, overheads etc., and provide credit facility to its customers. The
amount required to fund the day to day operations is called working
capital.
material [purchase of raw material for cash], payment for labour, power /
energy by which raw material is converted / processed into finished
product, storage and distribution of the finished product for sale, and ends
up with cash realisation from sales, thus making the cycle complete. This
cycle commencing with conversion of cash into raw material and ending
up with realization of cash from sale of the finished product is called
Operating Cycle. The operating cycle may also have additional phases
mainly due to the entry of credit dealings in addition to cash dealings purchase of raw materials / goods on credit, sale of goods / finished
products on credit, realization of cash from credit sales, payment for credit
purchase of goods / raw materials etc.
In the case of a trading concern, the operating cycle consists of the following
stages:
[i]
/ Credit].
[iii] Conversion of receivables / debtors into cash - leading to stage [i] of the
cycle all over again to start a new operating cycle.
From the above, we come to know that Working Capital represents the
funds / finance required to keep the operating cycle of an enterprise
moving without any stoppages. If the business has to run continuously,
there should be a continuous flow of sufficient liquid cash to pay for the
various items in the different stages of the operating cycle. In the above
two stages (the Operating Cycle of a manufacturing enterprise and a
trading concern) , we have seen how the operating cycle repeats itself. But
if one has to depend on only the cash generated from a cycle for the
occurrence of the next cycle, there will be interrupted production. The
entrepreneur is interested in turning out a continuous flow of goods /
finished products which only could generate enough cash to keep the
business in good health. This requires continuous infusion of certain
amount of liquid cash and the locking up of a certain amount of funds in
the different stages of the operating cycle.
Working Capital can be classified as [a]Permanent Working Capital which is the minimum amount of investment
in current assets necessary for carrying out operations for a given
period.;
[b]
(ii)
The length of the operating cycle for any business, generally, consists of
the following phases:
a. The period for which the raw materials are held in stock [pre-production
phase]
b. The length of the production cycle [production phase]
c. The period for which finished goods are held in stock [storage phase]
d. The collection period in respect of sales receivables. [collection phase]
(iii) The length of the operating cycle of a business is the sum of the lengths
of the above phases of the cycle. For the purpose of assessment of working
capital requirements and determining the level of current assets, in respect
of a borrower where no norms are prescribed in this regard, it is necessary
to compute the length of the above mentioned different phases of the
operating cycle as under:
(a) Pre-production Phase: Stock of raw materials X 365 /Annual cost of raw
materials
Consumed
(b) Production Phase :Work - in ProcessX 365/Annual Cost of production
Storage Phase Stock of finished goods X 365/Annual Cost of goods sold
(d) Collection PhaseBook Debts X 365/Annual Sales
5.
Method of Assessment
Borrower Category/
Working Capital Requirement
Economic Activity
PTM Projected Turnover
Borrowers in industry,trade and Fund
based workingcapital limits
Method (as enunciated by
service segments, Software industry. up to Rs.2 Crores from the Banking
Nayak Committee)
system (Rs. 5 Crores in the case of SSI
units).
PBF Permissible Bank Finance
Borrowers in Industry, trade and
Fund-based
workingcapital limits
method (modified version of
service
segments
Civil
above Rs.2 Crores (above Rs.5 Crores
MPBF method
in the case of SSI units) irrespective
Contractors
/
Builders
/
borrowers
engaged
in
of size of the credit limit PBF or CBM
construction activities
NOTE: Borrowers having Fund-based working capital limits above Rs.10 Crores from the Banking system
will have an option to go in for Cash Budget Method) .
Cash Budget Method [CBM]
(as prescribed by Kannan
Committee with modifications to
suit industry-specific needs
Borrowers
in
industry,
Optional for borrowers having
Trade and
service segments Civil
Fund-ba se d wor king ca pita l
contractors/builders borrowers engaged in limits above Rs.10 Crores from
construction activities.
the Banking system irrespective
of the size of the credit limit PBF
or CBM
Now, we will briefly discuss the different methods of working capital finance as under:
1
2
PBF
Method
will
contractors/builders/borrowers
also
engaged
be
in
applicable
construction
to
civil
activities
Assessment
A.
B.
C.
D.
E.
31.03.2013
Audited
31.03.2014
Audited
31.03.2015 31.03.2016
Audited
Estimated
..
borrowers who are Borrowers in industry, trade and service segments civil
contractors / builders /borrowers engaged in construction activities with
fund-based working capital requirements of above Rs.10 Cores from the
Banking system irrespective of the size of the credit limit PBF or CBM.
Computation of working capital finance: Under this method a realistic Cash flow
statement play a vital role for determining the working capital requirement.
The maximum cash gap in a month is the required working capital
requirement of a concern during the particular year.
Cash flow statement shows the sources of cash and utilization of the same
during a given period of time. Generally, cash flow statement is very
important while financing to Contractors. Bank will finance the gap between
the utilization and the source of fund. An example is furnished below for
understanding.
The cash flow statement of ABC Ltd (Contractor) and working capital
assessment is furnished below:
[Amount in Rs]
Month
Source of fund
Utilization of Fund
April
50,000
60,000
Gap
-10,000
May
June
70,000
90,000
90,000
1,10,000
-20,000
-20,000
July
1,00,000
1,00,000
August
1,20,000
1,50,000
0
-30,000
September
October
1,50,000
40,000
2,00,000
50,000
-50,000
-10,000
November
December
80,000
2,00,000
80,000
2,10,000
0
-10,000
January
1,60,000
1,95,000
-35,000
February
March
Eligibility for Bank Finance
1,40,000
1,90,000
1,80,000
2,20,000
-40,000
-30,000
50,000
account
of the company for the year ending 31.03.2016 and 31.303.2017
{Rs. in crore}
PROFIT AND LOSS A/C AND BALANCE
SHEET
INCOME
Audited
53.63
Audited
Audited
Estimates
Projected
131.30
183.81
185.00
190.00
53.63
131.30
183.81
185.00
190.00
53.63
131.30
183.81
185.00
190.00
Export Incentives
Duty Drawback
Others
Total Operating Income
131.30
53.63
183.81
185.00
190.00
Operating Expenses
Raw materials consumed Imported
Raw.materials consumed Indigenous
Other Spares consumed Imported
47.44
118.14
168.38
178.38
183.46
2.39
4.59
7.34
7.21
1.22
Depreciation
0.10
0.09
0.34
0.23
0.20
49.93
122.82
176.06
185.82
184.88
49.93
122.82
176.06
185.82
184.88
Opening Stock of FG
10.77
10.16
5.81
1.77
8.00
10.16
5.81
1.77
8.00
8.50
50.54
127.17
180.10
179.59
184.38
1.30
1.86
1.82
2.62
2.75
51.84
129.03
181.92
182.21
187.13
1.79
2.27
1.89
2.79
2.87
Interest
1.52
1.98
2.22
2.40
2.45
0.27
0.29
-0.33
0.39
0.42
0.04
0.54
0.04
0.54
0.04
0.54
0.21
0.27
0.33
0.39
0.42
0.27
0.33
0.27
0.33
0.21
0.39
0.42
0.21
0.39
0.42
0.33
0.21
0.39
0.42
0.42
0.55
0.62
0.62
Extraordinary items
Ad PAT (excl Extraordinary / Prior Year Items)
Dividend
Retained Profit
Cash Accruals
0.27
-
0 .37
11.46
-
11.44
-
10.25
-
13.00
-
13.00
-
Sub Total
Short term borrowings from Others
11.46
0.40
11.44
-
10.25
-
13.00
-
13.00
-
0.78
-
6.16
-
4.65
-
2.44
-
2.51
-
0.12
.-
0.16
-
0.19
-
..
-
17.76
15.09
15.44
15.51
0.04
0.81
5.24
5.51
11.72
26.81
15.00
30.44
15.00
30.51
12.76
0.02
0.11
0.01
0.26
7.27
20.03
8.36
26.12
9.00
9.00
21.89
10.00
-
1.88
2.65
10.00
28.03
0.71
3.13
12.00
12.00
27.94
2.54
14.12
12.00
12.00
32.68
12.77
12.00
12.00
33.02
12.53
Other Investments
Receivables Other than Deffered & exports (Domestic
Export Receivables
Deferred receivable (due upto 180 days.)
Raw Materials - Imported
Raw Materials - Indigenous
Work in process
Finished Goods (incl Traded Goods)
Other consumable spares - Imported
Other consumable spares - Indigenous
Sub total (Inventory)
Advances to suppliers
Advance payment of tax
5.36
-
10.18
10.18
0.05
1.00
21.12
0.10
0.86
0.76
0.01
-
>
--
12.80
4.58
-
6.12
6.12
0.06
0.05
22.87
1.65
0.09
1.56
-
7.60
7.81
-
2.24
2.24
0.10
8.00
8.00
-
0.07
23.65
0.10
28.47
2.52
0.34
2.18
2.29
0.23
2.06
---
8.50
8.50
-
0.12
28.96
2.06
0.20
1.86
---
0.01
3.60
3.60
2.11
2.11
2.15
2.15
2.20
2.20
21.89
8.36
1.66
28.03
5.11
1.29
27.94
8.56
1.57
32.68
13.03
1.84
33.02
13.45
1.87
With the above financials, the company has requested Corporation Bank for working
capital limit (Cash Credit Limit) of Rs.15.00 crore. Calculate detailed assessment
of working capital limit for the Company.
Detail of assessment of working capital limit is arrived as under: ASSESSMENT OF WORKING
CAPITAL LIMIT
Gross revenue for the current year 2015-16 estimated by the Company
Rs.185.00 crore
Rs.185.00 crore
1.The company has achieved total sales turnover of Rs.183.81 crore for the
year ended 31-032015 as against the sales turnover of Rs.131.30 crore for the year
ended 31.03.2014 showing a positive growth of 39.99% over the previous year.
2.
The company had projected a sales-of Rs. 185.00 crore for the year ended 3103-2015 as against this the firm has achieved total sales turnover of Rs.183.81 crore
showing 99 %( approx) achievement over the estimated figure.
3.
The company has estimated total sales turnover of Rs.185.00 crore for the year
ending 31.03.2016 and projected Rs.190.00 crore for the year ending 31.03.2017
envisaging 0.65% and 2.70% increase over 2015 and 2016 respectively. In this
connection, it is reported that the company has achieved total sales turnover of
Rs.90.00 crore for the five months 25 days endedd 25.09-2015 and on annualized
basis it works out to approximately Rs. 188.00 crore. Therefore, we have accepted
the estimated turnover of Rs.185.00 crore submitted by the company. Based on the
audited and estimated financial submitted by the company the holding level are arrived
as under:
Holding level:
Holding Levels
(Rs.in crore)
31.03.2013
Audited
31.03.2014
Audited
31.03.2015
Audited
31.03.2016
Estimated
31.03.2017
Projected
Raw Materials
(months consumption)
Stock in Process
(months cost of production)
10.18
6.12
2.24
8.00
8.50
2.42
0.58
0.15
0.53
0.55
Receivables - Domestic
5.36
12.80
4.58
7.60
7.81
(months sales)
1.20
1.17
0.30
0.49
0.49
5.58
21.12
0.78
0.20
0.52
1.30
3.95
22.87
6.16
0.63
0.16
6.32
16.83
23.65
4.65
0.33
0.19
4.84
12.87
28.47
2.44
0.16
2.44
12.65
28.96
2.51
0.16
2.51
Finished Goods
(Rs. in crore)
Assessment
A.
B.
C.
D.
E.
F.
G.
H.
Based on the above, the PBF computed for the year ending 31.03.2016 and
31.03.2017 as detailed above works out to Rs.13.00 crore as against which the
company has requested Rs.15.00 crore. Cash Credit limit of Rs.13.00 crore may be
sanctioned to the company for working capital requirement.