10 Working Capital Analysis Chap 5

8/12/2019 10 Working Capital Analysis Chap 5

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WORKING CAPITAL ANALYSIS

CHAPTER 5


WORKING CAPITAL MNAGEMENT Page 63


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5.1 Background

Running an Industrial unit involves dealing in commodities, goods, cash and

various money instruments. To acquire these, the corporate need to secure finance of

different types. The requirements of the corporate being of two types, namely, short-

term and long-term, the nature of finance required also is of same two types. Securing

both types of funds required by the corporate and their utilization to an optimal etent

to ensure that the cost of such funds is minimized are the activities which together

constitute !orporate "inance.

!orporate are able to generate only a minor portion #$%-&%'( of these finances

internally, the rest has to come from eternal sources, if a corporate has to grow and

remain profitable. !orporate Sector, therefore, has to depend heavily on the mar)et

sources. The present topic to discuss the main sources of finances for wor)ing capital.

*lthough long-term funds partly finance current assets and provide margin money for

wor)ing capital, large part #around +%-%'( of wor)ing capital is virtually eclusively

supported by short-term sources. The main sources of wor)ing capital financing are

"und based and on-fund based ban) credit, commercial papers and factoring.

*s *arti Industries td has acquired world-class epertise in the development /

manufacture of these chemicals. *arti is amongst the largest producers of 0enzene

based basic and intermediate chemicals in India. "or the chemical distribution it

requires huge amount of wor)ing capital to carry on its day to day activities smoothly

without any interruption. "urthermore, as *I, is also engaged in eport of chemicals,

it needs huge financial assistance for eport purpose.



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FINANCING


5. !ark"# Sc"nar$o

"inancial *ssistance provided by financial institutions / commercial ban)s mainly is

divided as under.

Today, the mar)et providing financing solutions to corporate is very competitive. The

only difference that the provider can ma)e is the differentiation through its services.

1odifying some of the product features can distinguish the service provider but there

is very less scope in that front as the current products are almost in line with its most

innovative nature. !ompanies utilize this product according to its nature of business

as well as financial terms agreed with its supplier and customers. *I meets its

wor)ing capital needs by borrowing "und based loans and on-fund based loans from

different ban)s. "und based loans include loans li)e 2verdraft 3 !ash credit, 4or)ing

capital term loan, 4or)ing capital demand loan, 5ac)ing !redit, *dvance against

retention money, "oreign !urrency oan, "oreign 6iscounting 0ill 5urchasing, etc.

4here as on-fund based loans include etter of !redit and 0an) 7uarantee.

7enerally in any company the requirements of on-fund based loans is more than

"und based loans.


F%N& BASE&

2ver 6raft3 !ash !redit

ine of !redit

0ill 6iscounting 3 5urchasing

4or)ing capital 6emand oan

Short-term !orporate loan

5ac)ing !redit #eport

finance(

"oreign 0ill 5urchasing

!ommercial 5apers

NON'F%N& BASE&

etter of !redit

0an) 7uarantee


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The 0an)ing and financial institutions grants financing limits based on assessment of

thewor)ing capital requirement of individual party. The assessment factors include

variouscharacteristics such as the nature of industry, industry norms, actual level of

activity for the previous year and the pro8ected level of activity for the subsequent

year to arrive at the wor)ing capital requirement. The ban) financing limit is

thereafter decided after factoring in margins on the different types of current assets

forming part of the wor)ingcapital.

"or borrowers having consortium arrangement9 The limit will be fied by the lead

ban) along with the ban) having the net largest shares. The individual ban)s: share

will also be intimated by the lead ban) to all the member ban)s in the consortium.

T(" )a$n *ac#or+ con+$d"r"d $n #(" "+#$)a#$on o* ,ork$ng ca-$#a r"/u$r")"n#

; The nature of business and sector-wise norms

; The level of activity of the business

T(" +#"-+ $n0o0"d $n arr$0$ng a# #(" "0" o* Work$ng Ca-$#a R"/u$r")"n#

; 0ased on the level of activity decided and the unit cost and sales price pro8ections,

the ban)s calculate at the annual sales and cost of production.

; The quantum of current assets #!*( in the form of Raw 1aterials, 4or)-in-

progress, "inished goods and Receivables is estimated as a multiple of the average

daily turnover. The multiple for each of the current assets is determined generally

based on the industry norms.

; The current liabilities #!( in the form of credit availed by the business from its

!reditors or on its manufacturing epenses are deducted from the current assets #!*(

to arrive at the 4or)ing !apital Requirement #4!R(.

S#andard For)ua" *or d"#"r)$na#$on o* Work$ng Ca-$#a

The issue of computation of wor)ing capital requirement has aroused considerable

debate and attention in this country over the past few decades. * directed credit

approach was adopted by the Reserve 0an) of ensuring the flow of credit to the

priority sectors for fulfillment of the growth ob8ectives laid down by the planners.

!onsequently, the quantum of ban) credit required for achieving the requisite growth

in Industry was to be assessed.


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multiples of the average daily output( and the 1aimum 5ermissible 0an) "inancing

#150"( was capped at a certain percentage of the wor)ing capital requirement thus

arrived at.

Work$ng Ca-$#a a++"++)"n# *or)ua -r"+cr$"d 2 #(" Tandon Co))$##"" $+ a+

und"r3

4or)ing !apital Requirement #4!R( = >!urrent assets i.e. !* #as per industry

norms( ? !urrent iabilities i.e. !@

5ermissible 0an) "inancing >50"@ = 4!R ? 5romoterAs 1argin 1oney i.e. 511 #to

be brought in by the promoter(

A+ -"r For)ua 13 511 = $%' of >!* ? !@ and thereby 50" = %' of >!* ? !@

A+ -"r For)ua 3 511 = $%' of !* and thereby 50" = %' >!*@ ? !

The analysis of balance sheet in !1* data is said to give a more detailed and

accurate picture of the affairs of a corporate. The corporate are required by all ban)s

to analyze their balance sheet in this specific format called C!A #!redit 1onitoring

*rrangement( data format and submit to ban)s. The 1aimum permissible 0an)

"inancing imit under fund based is fied on an annual basis. Bowever, since such

limit is provided to meet specific requirements, utilizing the limits is sub8ected to the

&P #6rawing 5ower(, which is decided on a monthly 3 quarterly basis.

The effective bank financing is therefore to the extent of the lower of:

; BANK FINANCING LI!IT9

6etermined on an annual basis based on an assessment of the current yearAs

pro8ections and the actual figures for the previous year.

; &RAWING POWER9

It is in)ed to the quantum of current assets #and current liabilities( owned by

the business with appropriate margins. "ied on a monthly3quarterly basis depending

on the submission of 1onthly3Cuarterly Information System returns indicating the

position of the stoc) statement, receivables, 4or) in 5rogress, payables, etc.

0an) "inancing #ma. permissible( = 1aimum 5ermissible 0an) "inancing imit

#150"( 2R 6rawing 5ower whichever is less.

Ho, $+ &P 4&ra,$ng Po,"r Cacua#$on don"6

oan or imits are being fied against BD52TBE!*TI2 of particular stoc).

The borrower use to submit his stoc) statement on regular basis say monthly,



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fortnightly and quarterly as decided by the ban) and the borrower. 0an) and borrower

both are agreeing vide an arrangement letter regarding ' of the margin on the stoc).

so after reducing the margin the ban) allow a borrower to draw amount against the

stoc) and fies the 6rawing power sub8ect to the maimum of his loan.

Cond$#$on A3Suppose the 0orrower has FG lacs of 7oods. 4ith %G' 1argin his

limit is fied as % lacs and also the drawing power i.e.( L$)$#

7 &ra,$ng Po,"r 7 5Lack+

Cond$#$on B3Suppose if the 0orrower is having only H lacs of goods with him $n

#(" n"8# month. ow imit will be the same % lacs and 65 will be

lacs.#i.e.( even though he has a limit of % lac)s his available Cr"d$#

$)$# ao,"d #o ,$#(dra, ,$ " 9u+# : ac+ #%G' of Hac)s(.Cond$#$on C3Suppose if the 0orrower has now F$ lacs of goods with him in the

third month. ow the limit = lacs and 65 = lacs #/ not +

lacs(. #i.e.( imit or 65 whichever is lower.



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5.; FINANCIAL ANALYSIS

The !ompany has been amply supported by its ban)ers and lenders who have shown

enormous trust and confidence in its ability and intention and stood by the company at

all times. Some figures that prove companies caliber are9

1 NET SALES #Total Sales ? Ecise 6uty(

NET SALES

YEAR


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"rom above !hart, we can say that *I had successfully ta)e advantage of

increase in a domestic demand as well as in a international mar)et.

*s we can see that, current sales of *I is more F&' of a year ended on

1arch $GG. Sales of *I were increased from FG' in $GG+-G to $&' in

year $GFF-F$.



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N"# ,or#( #Equity3Share !apitalK Equity Share 4arrants K Reserves andSurplus(

NET WORTH

YEAR


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; N"# Pro*$# !arg$n3

"rom above chart, we can say that *I increasing profit more in year $GF$ from

pervious year $GFF.

*s we can see that, current profit margin of *I is $.&H Times of a year ended on

1arch - $GGH. 5rofit margin of *I were increased from Rs &+.+ crore in $GG-

GH to H.FJ crore in year $GFF-F$.

: No. o* E/u$#2 S(ar"+3

*s we can see that, current no. of equity shares of *I are J,F$G,G& in

$GFF-F$. Raising the no of equity shares from continuously.



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5 To- 1< Produc#+ $n Aar#$ Indu+#r$"+ L$)$#"d

Aar#$ Indu+#r$"+ L$)$#"d

To- 1< Produc#+ A+ -"r N"# Sa"+

;15;1;

"rom above !hart, we can say that *I had successfully ta)e advantage of

increase et Sales in TopFG products from all *I 5roducts.


10 Working Capital Analysis Chap 5

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