WORKING CAPITAL FINANCE IN FOOD PROCESSING INDUSTRIES

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.

B. OPERATING CYCLE [WORKING CAPITAL CYCLE):

It may be observed that the day-to-day operations of an enterprise

constitute a cycle; the cycle begins with conversion of cash in to raw

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.

The Operating Cycle of a manufacturing enterprise consists of the following

stages/ phases:
[i] Conversion of cash in to raw materials - raw materials may be procured
on either payment of cash or on credit. If procured on credit, cash has to
be paid after some time. Likewise manpower, fuel / energy have to be
procured for the purpose.
[ii] Conversion of raw materials into stock in process; stock in process into
finished products.
[iii] Conversion of finished products into cash or receivables / debtors.
[iv] Conversion of receivables / debtors into cash - leading to stage [i] of the
cycle all over again to start a new operating cycle.

In the case of a trading concern, the operating cycle consists of the following
stages:
[i]

Conversion of cash in to goods / products for sale. [Goods / products may

be procured on either payment of cash or on credit. If procured on credit,
cash has to be paid after some time. Likewise manpower etc., has to be
procured for the purpose.]

[ii] Conversion of goods / products into cash or receivables / debtors [Sale on

Cash

/ 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.

C. CLASSIFICATION OF WORKING CAPITAL:

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]

Fluctuating Working Capital which is additional working capital required

at different times in the operating cycle due to cyclical fluctuations;

[c]Seasonal Working Capital which is the requirement of additional current
assets due to seasonal nature of the industry.
D. WORKING CAPITAL ASSESSMENT FOR BANK FINANCE:

1. Proper assessment of working capital requirements and computation of

maximum permissible bank finance, are based on the norms for holding
current assets and proper classification of current assets and liabilities.
2. Norms for holding Current Assets [Inventories and Receivables]: Bank
credit for working capital requirements

is linked with production

requirements. As such, the working capital requirement is assessed by

deciding on the reasonable level of holding current assets required for

production. This depends on the rate of flow of expenditure or costs within

the operating cycle and the length of the operating cycle.
(i) The rate of flow of expenditure or costs within the operating cycle, in
turn depends on the volume of production and sales and the costs
associated with such production or sales, each of which in turn is
influenced by several factors such as [a] Nature of business, [b] Size of
business, [c] Production process [d] Stock turnover velocity,
[e] Credit terms in the industry, [f] Trade credits available,[g] Unit cost of
the product, [h] Seasonal fluctuations and [i] Business cycle fluctuations.

(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

3. Proper Classification of Various Items of Current Assets and Current

Liabilities: In order to calculate net working capital and maximum
permissible bank finance, it is necessary to have proper classification of
various items of current assets and current liabilities.
4. Working Capital Gap: After estimating the reasonable level of current
assets [inventory, receivables etc.,] required for the operation of a unit,
sources of financing the same are decided. A part of the total current assets
can be financed by creditors for purchases and other current liabilities. The
remaining part of the current assets is called the working capital gap. It is
the borrower's requirement of finance to carry current assets other than
those financed out of current liabilities. Working Capital gap is thus current
assets minus current liabilities other than bank borrowings. This gap can be
partly financed by borrower's own sources / long term borrowings and
partly by bank finance.

5.

Working Capital Assessment for different category of borrowers:

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:

A. PROJECTED TURNOVER METHOD :

Applicability: This method of assessment should be applicable to all

borrowers who are engaged in manufacturing, services and trading
activities [including merchant exporters] with fund based working capital
requirements up to and inclusive of Rs 2 cores from the banking system
[ Rs.5 cores in the case of SSI units ].
Computation of working capital finance:

Gross Working Capital [GWC] requirements are assessed at a minimum

25 per cent of the annual projected turnover. Of the Gross Working
Capital so assessed, at least 20 percent shall be brought in by the
borrowers as margin by way of long term sources and the remaining 80
percent will be provided by the Bank by way of working capital finance.
The formula will be:
[Rs. in lakhs]

1
2

Projected Turnover for the year

Gross Working Capital [GWC]
[25% of the projected turnover]

Less : Borrower's Margin [A Minimum of 20% of GWC or

projected NWC whichever is higher ]

Permissible Bank Finance [2-3]

The above guidelines have been framed assuming an average production/

processing cycle of three months.
B. PERMISSIBLE BANK FINANCE [PBF] METHOD
Applicability:

The PBF method of assessment should be made applicable to

all borrowers who are engaged in manufacturing, services and trading

activities [including merchant exporters] with fund-based working capital
requirements of above Rs. 2 crores from the banking system [above Rs.5
crores in the case of SSI units].
The

PBF

Method

will

contractors/builders/borrowers

also
engaged

be
in

applicable
construction

to

civil

activities

irrespective of amount of fund-based working capital requirements from

the banking system. The above category of borrowers with fund-based
working capital limits above Rs 10 crores from the banking system should
be given an option to adopt the proposed Cash Budget Method.

Computation of working capital finance:

Rs. in lakhs

Assessment

A.
B.
C.
D.
E.

31.03.2013
Audited

Total Current Assets

Total Current liabilities (Other than Bank borrowings)
Working Capital Gap [A-B]
Min stipulated NWC(20% of CA excl export receivables)
Estimated Projected Net Working Capital
F. Permissible Bank Finance [PBF]
(C - D) or (A-E) whichever is lower

31.03.2014
Audited

31.03.2015 31.03.2016
Audited
Estimated

..

C. CASH BUDGET METHOD

Applicability:

This method of assessment should be applicable to all

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

Please ensure that the estimated cash flow statement is prepared in

line with past trend. The concept of working capital finance and different
method of working capital Finance is briefly explained above. Now, we will
assessed the working capital requirement of a Dalt processing (Food
Processing Industries) Industries collected from a Bank.
M/s Suraj Industries Pvt. Ltd is a private limited company is engaged in
processing of Dall since last ten years. The financial position of the
company since last 3 years (Audited) and estimated and projected financial
for the year ending 31.03.2016 and 31.03.2017 is furnished as under for
the purpose to determine the working capital requirement:

SURAJ INDUSTRIES PVT.LTD

Profit and loss account for the year ended 31.03.2015 and

estimated/projected profit and loss

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

31-03-2013 31-03-2014 31-03-2015 31-03-2016. 31-03-2017

Audited

Gross Sales - Domestic

Gross Sales - Export

53.63

Sub Total (Gross Sales)

Less Excise Duty & Sales Tax
Net Sales

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

Other Spares consumed Indigenous

Power and fuel

Direct labour and wages

Other manufacturing expenses

2.39

4.59

7.34

7.21

1.22

Depreciation

0.10

0.09

0.34

0.23

0.20

Sub Total (A)

49.93

122.82

176.06

185.82

184.88

Add: Op. Stock of WIP

Less: Cl. Stock of WIP

Total Cost of Production

49.93

122.82

176.06

185.82

184.88

Opening Stock of FG

10.77

10.16

5.81

1.77

8.00

Less: Cl. Stock of FG

10.16

5.81

1.77

8.00

8.50

Sub Total (B)

Total Cost of Sales

50.54

127.17

180.10

179.59

184.38

Selling, Gen. & Administration Exp

1.30

1.86

1.82

2.62

2.75

Cost of Sales + SGA

51.84

129.03

181.92

182.21

187.13

Operating Profit before Interest

1.79

2.27

1.89

2.79

2.87

Interest

1.52

1.98

2.22

2.40

2.45

Operating Profit after Interest

0.27

0.29

-0.33

0.39

0.42

Non operating income

Other Non Operating Income

0.04

0.54

Total non-operating Income

0.04

0.54

Non operating expenses

Loss on sale of assets

Prem. Expenses w/off

Other Non- operating exp.

Total Non-operating expenses

Net of Non-operating Income / Expenses

0.04

0.54

0.21

Profit Before tax

0.27

0.33

0.39

0.42

Provision for taxation: Current

Provision for taxation: Deferred

Sub Total: Provision for taxation

Net Profit After tax

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

Balance sheet as on 31.03.2015 and estimated B/s as on 31.03.2016 and 31.03.2017

LIABILITIES
Current Liabilities
Bank Borrowings - From our Bank
Bank Borrowings - From other Banks

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
-

Creditors for purchases

Advances/ payments from customers/deposits from de
Tax Provisions
Other Provisions
Dividends Payable
Statutory liabilities due within one year
Instl of Loans/Def pymnt cr/Others due in a year
Deposits
Other Current Liabilities due within one year
Total Current Liabilities
Term Liabilities
Debentures
Preference share capital
Dealers Deposit
Deferred Tax Liability
Term Loans
Term Deposits
Unsecured Loans (Quasi Equity)
Other term liabilities
Total term liabilities
TOTAL OUTSIDE LIABILITIES
Networth
Equity Share Capital (Paid-up)
Share Application (finalised for allotment)
Sub Total (Share Capital)
General Reserve
Revaluation Reserve
Partners capital / Proprietors capital
Share Premium
Capital subsidy
Other reserves
Balance in P&L Account (+ / -)
NET WORTH
TOTAL LIABILITIES
ASSETS
Current Assets
Cash & Bank Balances
Investments in Govt. and other trustee Securities
Fixed Deposits with Banks
.

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

Other Current Assets

Total Current Assets
Fixed Assets
Gross Block
Less: Accumulated Depreciation
Net Block
Capital Work in progress
Non Current Assets
Investments in Group concerns
Loans to group concerns / Advances to subsidiaries
Investments in others
Advs to suppliers of capital goods and contractors
Deferred receivable (greater than 180 days.)

5.36
-

10.18
10.18
0.05

1.00
21.12

0.10
0.86
0.76

0.01
-

>

Others (Noncurrent Loans & Advs, ICDs,etc)

Debtors
6 mths.
Deferred Tax
Asset
Other noncurrent assets (incl.dues from directors)
TOTAL NON CURRENT ASSETS
Intangible assets
Goodwill, Patents & trademarks
Acc Losses,Preliminary exps,Misc exps not w/off
TOTAL ASSETS
Net working capital
Current Ratio

--

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

Gross revenue Projection accepted by us for 2015-16

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

(months cost of sales)

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

Other Current Assets

Total Current Assets
Sundry Creditors
(months purchases)
Other Current Liabilities
Total Current Liabs other than
Bank Borrowings

Based on the acceptable holding level, assessment of working capital credit

requirements of the company under Permissible Bank Finance Method is arrived as
under:
Permissible Bank Finance:

(Rs. in crore)

Assessment
A.
B.
C.
D.
E.
F.
G.
H.

Working Capital Gap

Min stipulated NWC(20% of CA excl export recvs)
Estimated Projected Net Working Capital
PBF(A - B) or (A-C) whichever is lower
Net Working Capital to Total Current Assets (%)
Bank Finance to Total Current Assets (%)
Sundry Creditors to Total Current Assets (%)
Other Current Liabs to Total Current Assets

31.03.2013 31.03.2014 31.03.2015 31.03.2016 31.03.2017

Audited
Audited
Audited Estimated Projected
19.82
16.55
18.81
26.03
26.45
4.22
4.57
4.73
5.69
5.79
8.36
5.11
8.56
13.03
13.45
11.46
11.44
10.25
13.00
13.00
39.58
22.34
36.19
45.77
46.44
54.26
50.02
43.34
45.66
44.89
3.69
26.93
19.66
8.57
8.67
2.46
0.70
0.80
-

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.