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Methods of Working Capital Assessment

Autor:   •  December 20, 2015  •  Research Paper  •  498 Words (2 Pages)  •  585 Views

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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

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