Working Capital

Financing

Rakesh Punamiya
Asst. Gen.
Manager
JSW Energy
Limited

Debt financing

Loans

Loans
Loan Division

Working Capital

Fund Based

Non Fund Based

WORKING CAPITAL LOAN

Working Capital Facilities

Concept of Working Capital Funding

CA = OCL + FB + NWC

WCG = CA OCL

NWC = CA OCL FB

LTA
NWC
FB facility
NFB

OCL

CA

Fund Based Facility

Fund Based (FB) working capital represents that

portion of current liability which is going to build
up that portion of current assets which are not
financed by OCL and NWC.

FB facility will appear as Assets under Loans and

Advances of the Banks Balance sheet and as
Liability under the head Secured Loan in the
balance sheet of the company .

What is Assessment??

Assessment is defined as the process by which

one can determine the maximum amount of fund
can be availed from institutional lender to meets
a companys working capital requirement.

So assessment of working capital for a corporate

means the process of arriving at the maximum
quantum of working capital requirement of a
corporate for a particular period.

Assessment of Fund Based

Facility ..
In India, Fund Based working capital is
carried out with the help of any of the
three following processes :

Maximum Permissible Bank Finance

(MPBF) Process
Cash Budget Process
Turn Over Process

Methods of Assessment of
Fund Based Working Capital
FB Assessment
Method

MPBF

CB

II

III

TO

MPBF

MPBF Process
CMA form consists of 6 separate forms representing
different types of figures taken from Profit & Loss
and Balance Sheet of the company.
Form I
Form II
Form III
Form IV
Form V
Form VI

MPBF Process

Form I:

Total Existing Borrowing of the company as

on the date of application.

The proposed lender would decide to take a

fresh exposure depending on the existing
leverage and future cash out flows from the
existing borrowing of the company .

MPBF Process..

Form II:

The Profit and Loss figures are represented

Detail analysis is carried out for P&L
Accounts.
Since funding is mainly for operating
purpose a detail analysis of the P&L figures
with respect to production of the company
is carried out .

MPBF Process..

Form III:

The Balance Sheet figure is represented

Detail analysis is carried out for Balance
Sheet.
Here certain adjustment is carried out for
giving the effect of short term cash flows of
the company .

Adjustment of Current Asset

Reduction of current asset by deducting those

current asset which is not part of the normal
operation :
Loan given to group company ;
Receivable for more than 90/120 days ;
Fixed deposit kept in the form of margin money
;
Any other expenses incurred and not recovered
but not associated with efficient production
process .

Adjustment of Other Current

Liability

Decrease of other current liability would

increase the bank borrowing.
Addition of following liability would be
taken :

Term loan installment payable within one

year;
Some of the deferred liability which may
incur in the current year.

MPBF Process..

Form IV:

The Current Assets and Other Current

Liabilities are presented.
Since working capital finance is for funding
of current assets, a detail analysis is carried
for composition of current assets and other
current liabilities with respect to the holding
months .

MPBF Process..

Form V:
Method of calculation is carried out .
As mentioned earlier , under the MPBF method,
the FB working capital assessment is carried
out in any of the following methods:
Method I
Method II
Method III
The methods differs on the quantum of net
working capital to be brought in

MPBF Process..
I

II

III

CA

CA

CA

OCL

OCL

OCL

C=A-B

WCG

WCG

WCG

D=Min
NWC

0.25WCG

0.25CA

0.25(CA-CCA)
+ CCA

E=Est NWC

Est NWC

Est NWC

Est NWC

MPBF

Min (C-D,C-E)

Min (C-D,C-E)

Min (C-D,C-E)

MPBF Process..

Form VI :

The Fund Flow Statement

It represents the Sources of Net Working
Capital and the uses of Net working capital
I.e. the amount of net working capital went
for building up of different composition of
current assets.

Analysis of cash flow

Form VI represent cash flows coming

from long term and short term sources ;
This cash flow has to be segregated
into :

Cash flow from operation

Cash flow from investment
Cash from financing activity

The main aim is to generate more cash

flow from operation ;

Draw back of MPBF

Process..

In the case of MPBF process, the assessment is

carried out by taking the figure from Balance
Sheet alone.
Balance sheet is for a particular day.
For most of the companies, due to statutory
requirements , balance sheet is made as on
March 31 to coincide with the Financial Year .
If the company has seasonality in operation not
coinciding with the close of Financial Year, the
Balance as on the end of Financial Year will not
be able to capture such seasonality.

CASH BUDGET METHOD

Cash Budget Methods of

Assessment

Requirement of fund based working capital is

due to bridge the timing match between the
expenses towards production of goods and /or
service incurred and money realized from the
sale of the same goods and /or service.
Expenses is associated with the outflow of cash
where as the realization from the
products/services would be inflow of cash .
Moreover, the long term surplus would
represents components of NWC of the company

Cash Budget Methods of

Assessment

Revenue Account : Since working capital

represents the expenses incurred for the revenue

account, the inflows and outflows of the revenue
account are plotted in each month.
The heads under which inflows and outflows are
put represents the heads that will appear against
current assets and liabilities.
For example, the current asset consists of Raw
Material, SIP and Finished Goods.

Cash Budget Methods of

Assessment

If it purchase in cash then there would be

immediate cash out flow and if it purchases in
credit the creditor payment would capture this
cash flow after some time.
Now after purchase of raw materials there are
other manufacturing expenses in the form of
electricity, salary and wages for production and
other manufacturing expenses. Expenses are
plotted against these heads on monthly heads.
Then after the finished goods stages are reached,
there are selling and distribution expenses .These
expenses are plotted monthly wise .

Cash Budget Methods of

Assessment

After the selling and distribution expenses there

are finance charges or interest expenses. The
interest expenses are divided into two groups
,interest on working capital finance and interest
on long term liabilities. However, both the
interest would come in the revenue account
( others wise debt trap like situation will arise) .
Now the tax payment would take place and also
dividend payment would take place. Both this
would be incorporated in the cash out flow.

Cash Budget Methods of

Assessment

Capital Account:
Inflows :
Inflows on account of induction of fresh
equity capital
Inflows on account of fresh term liability in
the form of term loan and debenture
Inflows on account of unsecured loan

Cash Budget Methods of

Assessment

Outflows:
Outflows on account of investments in financial
assets
Outflows on account of repayment of term
liability
Outflows on account of repayment of
unsecured loan.

Cash Budget Methods of

Assessment

Inflow Revenue Account :

Cash Sales
Realisation of receivable
Interest or earning from investment

Outflow revenue account :

Payment of creditor
Payment of cash purchase
Payment of other liability

Cash Budget Methods of

Assessment

Difference between expenses and

income is called deficit ;
The meaning of revenue deficit in a
period means that during the period the
borrowers inflow of cash associated with
operation is less than the outflow of cash
associated with such operation .
A part of this deficit would be funded by
long term surplus.

Cash Budget Methods of

Assessment

Capital Account Inflow :

New Equity
New Term Loan
Reduction/ sale of investment

Capital Account outflow :

Increase of fixed asset

Increase of term loan
Repayment of term loan

Cash Budget Methods of

Assessment

Difference is called capital surplus .

Part of revenue deficit would be met by
Capital Surplus
Remaining part by taking fund based
working capital borrowing from Banking.
Cash budget the closing balance is the
DP of that month and the maximum limit
is the pick limit .

Limit and DP in Cash Budget

TURN OVER METHOD

Turn Over Method

This method is applied for small business houses. The

assumption of this method is very simple.
The working capital cycle is 3 months i.e. the sales are
rotated four times a year. The total working capital
requirement is 25 % of the projected sales.
Out of this total requirement, at least 5% is to be brought in
from long term sources. So the remaining 20% would be
minimum amount of fund based working capital to be given
to a company.
This is mainly followed for fund based working capital limit
of up to Rs 500 lacs.

Thank you