Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Module I: Basics of Credit and Credit Process

Chapter 6: Working Capital Finance

Dr. M. Manickaraj

Objective
After reading the chapter one will be able to appreciate the importance of working capital
finance, alternative methods for estimating working capital requirement of business
firms and various products for financing working capital.
Structure
6.1 Introduction
6.2 Operating cycle and working capital requirement
6.3 Working capital requirement
6.4 Methods for assessing working capital requirement
6.5 Products for financing working capital
6.6 Summary and conclusion

6.1 Introduction
Historically, providing working capital finance was the main business of commercial
banks. Term loans and project finance were provided by the development finance
institutions (DFIs) also referred to as term lending institutions. Agriculture credit was
provided mainly by cooperative banks and literally no lending institution was providing
retail loans. However, after liberalisation of banking industry commercial banks have
started providing a variety of loans to all types of customers. Nonetheless, working capital
finance remains the major business for many commercial banks.
Term lending institutions and non-banking finance companies (NBFCs) too provide
working capital. However, they do not provide cash credit which is referred to as line of
credit, because in order to operate cash credit there is a need for a current account which
can be offered by commercial banks only. As such working capital loan offered by
institutions other than commercial banks is nothing but term loans for a short period.
Cash credit offered by a bank is always offered as a limit within which the customer can
draw money from the loan account whenever needed and deposit money in the account
whenever money is available. To put it differently, cash credit allows both debit and credit

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

into the loan account. On the one hand, this flexibility provides comfort to the customers
and on the other hand, it enables banks to monitor borrower’s operating performance
from the transactions made in the loan accounts.
Working capital loan is offered to finance day to day operations of borrowing companies.
Exit from working capital relationship by banks is very difficult. Exit from working capital
relationship may lead to shutting down operations of the company. It may be possible if
the company is able to raise equity capital or working capital is raised from some other
lender. Thus, cash credit offered by commercial banks in India is not self-liquidating in
nature. Therefore, close monitoring of cash credit becomes extremely important.
Working capital support will be needed as long as business operations continue and
hence if a customer is doing well and pays interest on cash credit regularly the lending
bank can get perpetual business from the customer. Rather, if the business of the
customer grows the customer’s working capital requirement will normally grow and
hence the bank’s loan book will also grow.
6.2 Operating cycle and working capital requirement
As discussed in the previous section, working capital is meant for financing the operating
cycle of borrowers. For a typical manufacturing firm operating cycle is the time lag
between procurement of raw material and collection of cash from its customers. It covers
the time taken for converting raw material into finished goods, sale of finished goods and
collection of cash from customers (Figure 6.1).
From the time raw material is procured and till the time finished products are sold the
company concerned will be holding the material in the form of raw material, work in
process and finished goods. This period may be referred to as inventory period. Time
taken for collecting cash from the customers may be referred as receivable period. The
operating cycle of a manufacturing firm thus is the sum of inventory period and
receivable period. (Chapter on Financial Statements Analysis may be referred to for the
equations for finding out inventory period, receivable period and creditor period).
A part of the operating cycle will be financed by suppliers of raw material and the balance
(operating cycle minus creditor period) is referred to as net operating cycle (Figure 6.2).
Net operating cycle is also referred to as cash cycle or cash to cash cycle. Net operating
cycle is the period for which working capital is needed.
Figure 6.1 : Operating Cycle

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Figure 6.2: Net Operating Cycle

Operating cycle and net operating cycle can be written as in Equations 6.1 and 6.2
respectively.
Operating Cycle  Inventory Period  Receivable Period . . . . . . . . . . . . . . . . . . . . . . (6.1)
Net Operating Cycle  Operating Cycle  Creditors Period . . . . . . . . . . . . . . . . . . . . . . (6.2)

The length of operating cycle determines the working capital requirement. Longer the
operating cycle higher will be the working capital requirement and shorter the operating
cycle lower will be the working capital requirement. As such, it is highly important for
working capital provider to know the operating cycle of his customer. Longer operating
cycle will result in higher levels of inventory and receivables and hence higher working
capital requirement. Therefore, it is prudent for the working capital provider to question
whether the length of the operating cycle of the customer is optimal or not. In fact, shorter
operating cycle means the customer is able to convert the raw material into finished
goods, sell the finished goods and then could collect cash from his customers within a
short period of time. Thus shorter the operating cycle more efficient the operations are
and longer the operating cycle less efficient the operations are. Therefore, the lenders
should be wary of financing a customer whose operating cycle is very long. However, the
following points need to be kept in mind while providing working capital:
• Length of operating cycle varies from sector to sector: Each industry differs from
other industries in terms of the raw material availability, manufacturing process,
customer expectations, nature of product, and so on. Accordingly, the length of
raw material holding, manufacturing cycle and inventory policy will vary.
Similarly, different industries may follow different terms for collecting cash from
customers and similarly different terms for payment to suppliers of raw material.
• Benchmarks need to be set for different sectors specifically: For the reason
explained in the previous point, benchmarks for the holding periods and operating
cycle may be set for each sector specifically.
• The length of operating cycle varies from time to time: Various factors particularly,
demand supply conditions change from time to time and hence the operating cycle

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

length changes over time. In general, during boom periods the length of operating
cycle will decrease substantially and vice versa.
• Bargaining power of players determine operating cycle: Bargaining power of
suppliers will determine the length of raw material inventory period and creditor
period. Similarly, bargaining power of customers will determine the receivable
period. For examples in the automobile industry the suppliers of auto components
do not have the bargaining power. Therefore, the auto component vendors have
to carry the inventory so that they can deliver them as when the vehicle
manufacturers need. The vendors also have to accept delayed payment for their
components. On the other side of the value chain the dealers who buy the vehicles
from the vehicle manufacturers and sell them to end customers too lack
bargaining power. Therefore, they have to make payment for the vehicles to the
vehicle manufacturers quickly. Vehicle manufacturers therefore enjoy long
creditor period and short receivable period.
• Banks can target the sectors which need working capital: As explained in the
previous point vehicle manufacturers may not need any working capital support.
Whereas, auto component manufacturers and dealers would need working
capital.
• Banks may also design suitable working capital products: One popular working
capital product is channel finance. This is offered to auto component vendors.
Similarly, dealer finance is offered to dealers of automobiles. For more details on
working capital products the section on Products for Financing Working Capital
may be referred.
• Macroeconomic conditions impact the operating cycle: One major factor that
influences operating cycle of various sectors is the macroeconomic conditions.
Cyclical sectors like consumer durables, capital goods, real estate and the like are
particularly affected significantly by changes in macroeconomic conditions. In
general, the length of operating cycle of various sectors will increase during
economic slowdown/recession and will decrease when the economy recovers.
• Length of operating cycle may also indicate the level of efficiency and/or risk:
Other things remaining the same, a company with longer operating cycle can be
said to be inefficient and hence is risky.
6.3 Working Capital Requirement
Working capital can also be viewed as the capital required for financing current assets of
business firms. It can be understood by reading Table 6.1 which is the shape of balance
sheet of typical manufacturing firms. The table shows that current assets can be financed
by current liabilities including short term borrowings and the balance by long term
sources of finance including equity capital and long-term borrowings. Ideally, a part of
current assets should be financed by equity capital. Equity capital used for financing
current assets is often referred to as margin for working capital.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Banks in India generally consider only inventory and receivables for determination of
working capital financing. Other items like cash and bank balance, other current assets
and loans and advances are not considered. Similarly, short term borrowings and trade
credit are the two primary sources of finance for working capital. While borrowings are
loans offered by banks trade credit is offered by suppliers of raw material.
Table 6.1: Shape of Balance Sheet

Capital and Liabilities Amount Assets Amount

Equity Capital Fixed Assets

Long-term borrowings

Current Assets:
- Inventory
- Trade receivables
Current Liabilities: - Cash & bank balance
- Short-term borrowings - Other current assets
- Trade credit - Loans and advances
- Other current liabilities
- Provisions

6.4 Methods for Assessing of Working Capital Requirement

Estimating working capital requirements of firms is one of major challenges before
commercial banks. The requirements should be assessed such that it will not result in
excess financing nor under financing. There are various methods in vogue for estimating
working capital requirements. These methods can be broadly classified under the
following headings:
 Balance sheet based methods
 Turnover based methods
 Cash flow based methods
6.4.1 Balance Sheet Based Methods
A Study Group under the chairmanship of Mr PrakashTandon, the then Chairman and
Managing Director of Punjab National Bank was constituted by the Reserve Bank of India
in July 1974. The study group has recommended three alternative methods for estimating
working capital requirement of business firms which is referred to as the maximum
permissible bank finance (MPBF). The methods recommended by the study group are
commonly referred to as MPBF1, MPBF2, and MPBF3 respectively. These methods are
also referred to as the first method, second method and third method respectively. The

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

first and second methods are used by many banks in India till today. Whereas the third
method is not in use. The three methods are as follows:
• First Method
MPBF = 0.75 * (Current Assets – Other Current Liabilities) …………………………. (6.3)
• Second Method:
MPBF = 0.75 * Current Assets – Other Current Liabilities ………………………….. (6.4)
• Third Method:
MPBF = 0.75 * (Current Assets - Core Current Assets) – Other Current Liabilities… (6.5)
Where,
• Other current liabilities are current liabilities other than bank credit (i.e., total
current liabilities minus short term borrowings)
• Core current assets are the current assets that will have to be maintained at the
lowest level of operations
• Current assets minus other current liabilities is called Working Capital Gap
(WCG)
Comparison of MPBF 1 and MPBF2
It is necessary for every banker to understand the implications of using the first method
(MPBF1) and second method (MPBF 2) recommended by the Tandon Committee. Let us
assume that the total current assets of X Ltd is Rs. 100 crore and other current liabilities
will be in the range of 50 to 100. At different levels of other current liabilities, bank credit
that can be sanctioned under both the methods, current ratio and equity margin have
been worked out and the same are presented in Table 6.2.
Table 6.2 provides the following information:
 Working capital credit that can be sanctioned under the second method will
always be lower than under the first method.
 Working capital margin under the second method will be not less than 25%
 If second method is followed current ratio will be not less than 1.33.
 If the first method is used the current ratio will be different at different levels of
other current liabilities. Higher the amount of other current liabilities lower will
be current ratio and equity margin. Lower the amount of other current liabilities
higher will be the current ratio and equity margin.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Table 6.2: Comparison of First and Second Method recommended by

Tandon Committee

Current assets = Rs. 100 crore

Total Current
Other Working Bank Credit Liabilities Current Ratio Margin (%)
current Capital MPBF MPBF MPBF MPBF MPBF MPBF
liabilities Gap MPBF 1 MPBF 2 1 2 1 2 1 2
100 0 0 0 100 100 1 1.00 NA NA
90 10 7.5 0 97.50 90 1.026 1.11 2.50 NA
80 20 15 0 95.00 80 1.053 1.25 5.00 NA

75 25 18.75 0 93.75 75 1.067 1.33 6.25 NA

70 30 22.5 5 92.50 75 1.081 1.33 7.50 25
60 40 30 15 90.00 75 1.111 1.33 10.00 25
50 50 37.5 25 87.50 75 1.143 1.33 12.50 25

Table 6.2 shows clearly that the first method will result in inconsistent level of current
ratio and equity margin. One cannot be sure how much margin will be available if working
capital is estimated using the first method. Therefore, it is suggested that the first method
shall not be used.
Banks use the first method in order to provide more credit and hence the equity margin
to be provided by owners of firms will be less. If this is the reason behind the use of the
first method it is suggested that the second method may be modified as in Table 6.3.
Table 6.3: Modified Versions of the Second Method (MPBF2)
Current
Method Ratio Margin
MPBF = 0.60 x CA - CL 1.67 40%
MPBF = 0.70 x CA - CL 1.43 30%
MPBF = 0.75 x CA - CL 1.33 25%
MPBF = 0.80 x CA - CL 1.25 20%
MPBF = 0.83 x CA - CL 1.20 17%
MPBF = 0.85 x CA - CL 1.18 15%
MPBF = 0.90 * CA - CL 1.11 10%

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

6.4.2 Turnover Based Method

In December 1991, the RBI constituted a committee under the chairmanship of Mr P R
Nayak the then Deputy Governor RBI and the committee has recommended a method for
estimating working capital requirements of small enterprises. The method was meant to
be used in case of small enterprises which are not equipped to prepare the projected
financial statements.
The Nayak Committee has suggested that the minimum working capital requirement
shall be estimated as 25% of projected turnover. Out of the 25%, bank credit should be
20% and margin should be 5%.
The method has assumed that the minimum length of operating cycle of small enterprises
is three months. Hence, if the operating cycle of a borrower is longer than three months
bank finance will be inadequate and if the cycle is shorter than three months bank credit
will exceed the need.
As per a recent Government Advisory the Banks are have make following modifications
in working capital assessment process with respect to Micro and Small Enterprises whose
Fund Based W.C. requirements are up to Rs.5.00 Crores.
 To increase the working capital credit limit from Minimum 20% of accepted
projected turnover to 25%.
 To consider providing Working Capital up to 30% of projected turnover if the
borrower will sell goods online.
Revised Guidelines MSMEs:
Particulars Existing Revised
1 For MSMEs whose FB WC 20% of the projected 25% of the projected
limits requirement is upto turnover or computed turnover or computed
Rs.5 crores. on the basis of Tandon on the basis of Tandon
first method of lending first method of lending
whichever is higher whichever is higher
Margin 5% of the projected 6.25% of the projected
turnover turnover.
2 For MSMEs who maintain No guidelines 30% of the projected
digital records and whose turnover which is
Fund based working expected to be digitally
capital limits requirement transacted.
is upto Rs.5.00 crores
Margin NA 7.5% of the portion of
turnover which is
projected to be digitally
transacted.

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Illustration I :

Projected Turnover by Company X : Rs.10.00 crores

Of which - Non Digital Mode : Rs. 6.00 crores
- Digital Mode : Rs. 4.00 crores

Hence company X has 40% of turnover under Digital mode. Hence it is eligible for
additional working capital.

Calculation:
1. Sales through Non Digital Mode:
Turnover method Amount in
Crore
Projected Sales 10.00
Non Digital Mode 6.00
Accepted level by Bank (Assumption) 6.00
31.25% of Turnover (i.e.,) 25% of Turnover plus margin of a 1.88
6.25%
Min. Margin 6.25% of Turnover b 0.38
Actual /Projected NWC * c 0.38
Owners Margin (Higher of (b) & (c)) d 0.38
MPBF = (a) – (d) a-d 1.50

2. Digital Mode
Turnover method Amount in
Crore
Projected Sales 10.00
Non Digital Mode 4.00
Accepted level by Bank (Assumption) 4.00
37.50% of Turnover (i.e.,) 30% of Turnover plus margin of a 1.88
7.50%

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Min. Margin 7.50% of Turnover b 0.38

Actual /Projected NWC * c 0.38
Owners Margin (Higher of (b) & (c)) d 0.38
MPBF = (a) – (d) a-d 1.50

For illustration purpose we have assumed actual/projected NWC is the same as

required margin.

The Limit will be as under:

Limit assessed for Non Digital Mode : Rs.1.50 crores
Limits assessed for Digital Mode : Rs.1.20 Crores
Total limit to be sanctioned : Rs.2.70 crores

However, if FB limit assessed as per the Tandon first method of lending is more, then
limit assessed as per first method of lending is to be sanctioned.

Illustration II:
Turnover of Company Y : Rs.10.00 crores
Of which - Non Digital Mode : Rs. 8.00 crores
- Digital Mode : Rs. 2.00 crores

Company Y has only 20% of turnover under Digital mode. Hence it is not eligible for
additional working capital as the turnover projected under digital mode is less than
25% of the total turnover. In such cases the whole turnover will be considered as
Non Digital mode and assessment will be carried out accordingly.

Calculation:
1. Sales through Non Digital Mode:
Turnover method Amt. In
Crore.
Projected Sales 10.00
Non Digital Mode 10.00

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Accepted level by Bank (Assumption) 10.00

31.25% of Turnover (i.e.,) 25% of Turnover plus margin of a 3.13
6.25%
Min. Margin 6.25% of Turnover b 0.63
Actual /Projected NWC * c 0.73
Owners Margin (Higher of (b) & (c)) d 0.73
MPBF = (a) – (d) a-d 2.40

However, if FB limit assessed as per the Tandon first method of lending is more, then
limit assessed as per first method of lending is to be sanctioned.

6.4.3 Cash Flow based Methods

Following are the two methods which enable estimation of working capital based on cash
flow of borrowing companies.
 Operating cycle method
 Cash budget method
a. Operating Cycle Method
As discussed earlier in the chapter working capital is meant for financing operating
cycle of business firms. According to the method working capital requirements of firms
may be estimated as follows:
Bank Credit = Inventory + Receivables – Trade Credit – Margin …………………… (6.6)
Where,
Inventory = Projected Sales x Inventory Period / 365 …………………… (6.7)
Receivables = Projected Sales x Receivable Period / 365 ……………………. (6.8)
Trade Credit = Projected Sales x Creditors Period / 365 ……………………. (6.9)
Inventory 365
Inventory Period 
Sales ………………………………………… (6.10)
Receivable s  365
Receivable Period 
Sales ………………………………………… (6.11)
Trade Creditors  365
Creditors Period 
Sales …………………………………………. (6.12)
Margin can be preferably determined as % of (Inventory + Receivables)

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It may be noted that holding periods of inventory, receivables and creditors need to be
decided beforehand. One alternative for determining the holding periods is to consider
the average of holding periods over few years in the past.
Estimation of working capital under Operating Cycle Method - Illustration
Given below is the data of Mars Ltd.
• Projected Sales of X Ltd : Rs. 730crore
• Inventory period : 30 days
• Receivable period : 45 days
• Creditors period : 25 days
• Margin required for working capital is : 25%
Working capital requirement of Mars Ltd can be estimated as in Table 6.4.
Table 6.4: Estimation of Working Capital under Operating Cycle Method
Item Amount
Inventory (730 x 30/365) 60
Receivables (730 x 45/365) 90
Total (Inventory + Receivables) 150
Margin (25% of Total) 37.50
Trade Credit(730 x 25/365) 50
Bank credit (Total – Margin – Trade Credit) 62.50

b. Cash Budget Method

Cash budget is a statement showing budgeted receipts, payments, and surplus/deficit
during each period, say, every month. It is an ideal tool for ascertaining working capital
requirement of not only seasonal enterprises but also of all types of firms. Cash budget
will show the cash gap (i.e., working capital requirement) which will be different during
different months. Firms will require higher working capital during peak seasons. During
off seasons it may need very less or no working capital. Accordingly, the bank can release
the loan. The highest gap is called the peak level deficit and this may be fixed as the peak
level working capital limit.
The unique advantages of cash budget for working capital estimation are as follows:
• Cash budgets will enable effective monitoring of loans
• It will enable effective credit planning by lending institutions
• Need for sanctioning adhoc limits and/or enhancement of credit limits during
the currency of a loan may not normally arise

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Cash budget is used by many banks for estimating working capital requirement of
seasonal businesses like sugar, tea and the like. However, the method can be used for
estimating working capital requirement of any business firm.
Cash Budget – An Illustration
Royal Manufacturing Company has asked to create a cash budget in order to determine
its borrowing needs for the period June to October. The following information are
gathered.
Month Sales (INR) Other Payments (INR)
June 172,000 80,000
July 142,000 75,000
August 121,000 70,000
September 93,000 50,000
October 76,000 45,000
November 81,000

April and May sales were INR115,000 and INR135,000, respectively. The firm collects
35% of its sales during the month, 55% the following month, and 10% two months after
the sale. Each month it purchases raw material equal to 60% of the next month’s expected
sales. The company pays for 40% of its raw material purchases in the same month and
60% in the following month. However, the firm’s suppliers give it a 2% discount if it pays
during the same month as the purchase. A minimum cash balance of INR25,000 must be
maintained each month, and the firm pays 6% annually for short-term borrowings from
its bank.
Create a cash budget for June to October. The cash budget should account for short-term
borrowing and payback of outstanding loans. The firm ended May with INR30,000 cash
balance.
Royal Manufacturing Company’s cash budget may be prepared by using the following
steps:
1. Estimation of collection from customers during each month
2. Estimation of purchases of raw material during each month
3. Finally, preparation of cash budget

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Collection from Customers

% of sales to be
June July August September October
collected
Same month 35% 60200 49700 42350 32550 26600
Previous month 55% 74250 94600 78100 66550 51150
2 months before 10% 11500 13500 17200 14200 12100
Total collection 100% 145950 157800 137650 113300 89850

Payment for Purchases

Payment
(% of May June July August September October
purchases)
Purchases --- 103200 85200 72600 55800 45600 48600
Same
month 40% 33398.4@ 28459.2 21873.6 17875.2 19051.2
Previous
month 60% 61920 51120 43560 33480 27360
Total 100% 95318 79579 65434 51355 46411

@: 85200 x 40% less 2% discount. Payment made in subsequent months have been
estimated similarly.
Cash Budget of Royal Manufacturing Company
June July August September October
Opening balance of cash 30000 25000 25000 25000 25000
Collection from customers 145950 157800 137650 113300 89850
Total 175950 182800 162650 138300 114850

Payments:
To suppliers 95318 79579 65434 51355 46411
Other payments 80,000 75,000 70,000 50,000 45,000
Total 175318 154579 135434 101355 91411
Surplus (Deficit) 632 28221 27216 36945 23439
Closing balance 25000 25000 25000 25000 25000
Borrowing (Repayment) 24368 -3221 -2216 -11945 1561

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6.5 Products for financing working capital

Following is the list of some products that can be offered by lending institutions to firms
for financing working capital:
• Cash credit
• Secured line of credit with specified drawing limit offered to
businesses for a period of one year for their working capital
requirement. Banks open a cash credit account with cheque facility
for the customer to operate the same.
• Working capital term loan
• This is a funded facility provided to bank customers wherein the
irregular portion of cash credit other than unrealised interest (on
both cash credit and institutional loans) may be converted into term
loan with certain specified repayment period.
• Seasonal loan
• Such loans meet the short term financing needs of seasonal
companies. It is usually offered as a line of credit lasting for a certain
number of months.
• Collateral/asset based finance
• Such loans are specialized methods of providing working capital
based on certain assets such as inventory or receivables as
collateral.
• Order based
• Such loans provide working capital finance for executing specific
purchase or work orders from specific clients. Upfront payment can
be made to suppliers under purchase orders followed by an invoice
discounting structure where the final payment is collected from the
OEMs at the end of the credit period.
• Channel finance
• Such loans are based on supply chain finance relationships between
companies where working capital financing to a vendor may be
based upon the credit standing of a large OEM client.
• Discounting/purchase of bills.
• Such loans finance receivables by discounting the bills before they
are due. The loans are for a certain period and are usually followed
by a bullet repayment of loan amount.

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• Factoring
• Such loans also finance a supplier’s invoices and receivables at a
discount for certain period of time. The factor is usually then
responsible for collecting the amount from the customer.
6.6 Summary and Conclusion
Provision of working capital is a major business for lending institutions and commercial
banks are having an edge over other lending institutions in providing working capital that
will match the actual requirement of borrowers. Working capital is meant for financing
operating cycle of business firms and hence banks need to understand the length of
operating cycle and the efficiency of operations of borrowing companies to determine the
working capital requirement and to understand the risk involved. There are various
methods for estimating working capital requirement. However, balance sheet based
methods and turnover based methods may mislead and hence operating cycle method or
cash budget method may be used. Similarly, there are many alternative products for
meeting working capital requirements of business firms. Depending on the customers’
requirements and risk involved appropriate product may be offered.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Annexure 1
Case Study on Estimation of Working Capital Requirement
Projected financials of Solar Steel Ltd for the year 2017 are given in Table 4.5. The
historical average holding periods of current assets and current liabilities of the
company were as follows:
 Inventory period : 45 days
 Receivable period : 40 days
 Creditor period : 60 days
The company has sought working capital loan of Rs. 200 crore from Jupiter Bank.
However, the credit department of the bank wishes to find out the amount that can be
sanctioned. The equity margin for the loans as stipulated by the bank’s credit policy is
25%.
Table 4.5: Projected Financials of Solar Steel Ltd for the year 2017
2017 2017
Tangible Net Worth 417.31 Net Sales 3735.81
Medium & Long Term Loans 181.29 Other Income 3.35
Current Liabilities# 811.23 EBIDTA 204.35
Net Block 222.44 Depreciation 26.85
Investments in group
2.79 Interest 105.13
companies
Taxes 24.68
Current Assets 1184.60
Net Profit / (Loss) 54.68
#: Includes working capital loan of Rs. 200 crore. All figures are in INR Crore.
Assessment of Working Capital Requirement of Solar Steel Ltd:
Turnover Method:
25% of projected sales (25% of 3735.81) = Rs. 933.95
Less Margin of 5% of projected sales (5% of 3735.81) = 186.79
Bank Loan = 747.16

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First Method of Tandon Committee:

Bank Loan = 0.75 x (Current Assets – Other Current Liabilities)
Other Current Liabilities = Current Liabilities – Bank Loan
= 811.23 – 200
= 611.23 crore
Bank Loan = 0.75 x (1184.60 – 611.23)
= 430.03 crore
Second Method of Tandon Committee:
Bank Loan = 0.75 x Current Assets – Other Current Liabilities
= 0.75 x 1184.60 – 611.23
= 277.22crore
Operating Cycle Method:

Item Amount
A. Inventory 470.81

B. Receivables 409.40
C. Total (A + B) 880.21

D. Margin (25% of C) 220.05

E. Trade Credit 624.34

F. Bank loan (C – D – E) 35.82

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