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Working Capital Assessment - Working Capital And Banking Policy
Financial Management - WORKING CAPITAL MANAGEMENT
Working Capital Assessment - Working Capital And Banking Policy
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After dissolution of Tandon Committee guidelines (Known as Maximum Permissible Bank finance – MPBF), except state bank of India (SBI) which is the largest commercial bank in the country, no other bank has come out with any guidelines for assessing the working capital.
Working
Capital Assessment
After dissolution of Tandon Committee guidelines (Known as Maximum Permissible Bank finance – MPBF), except state bank of India (SBI) which is the largest commercial bank in the country, no other bank has come out with any guidelines for assessing the working capital. Most of the banks are virtually following same MPBF with or without slight modification. Other banks are very closely watching the SBI guidelines for slowly adopting the SBI guidelines in one form or the other. The methods, which are being followed by the SBI, are as follows.
1. Projected Balance Sheet method: It is the statement, which provides details regarding anticipated sales revenues, expense, assets and liabilities on a future date. Out of this information a firm can easily project requirements of the working capital.
2. Cash budget method: It is primarily concerned with anticipated sources and application of cash for future period. This is very useful to the management to plan for raising adequate cash and appropriates investment of surplus cash. In general the cash budgets are prepared on a monthly basis.
3. Turnover method: This is a simple method of estimating working capital requirements. According to this method, on the basis of past experience between sales and working capital requirements, a ratio can be determined for estimating the working capital requirements in future. For example, if the past experience shows that working capital has been 25% of sales and it is estimated that the sales for the next year would amount to Rs.1 lakh, the amount of working capital requirement can be assessed as Rs. 25,000.
After dissolution of Tandon Committee guidelines (Known as Maximum Permissible Bank finance – MPBF), except state bank of India (SBI) which is the largest commercial bank in the country, no other bank has come out with any guidelines for assessing the working capital. Most of the banks are virtually following same MPBF with or without slight modification. Other banks are very closely watching the SBI guidelines for slowly adopting the SBI guidelines in one form or the other. The methods, which are being followed by the SBI, are as follows.
1. Projected Balance Sheet method: It is the statement, which provides details regarding anticipated sales revenues, expense, assets and liabilities on a future date. Out of this information a firm can easily project requirements of the working capital.
2. Cash budget method: It is primarily concerned with anticipated sources and application of cash for future period. This is very useful to the management to plan for raising adequate cash and appropriates investment of surplus cash. In general the cash budgets are prepared on a monthly basis.
3. Turnover method: This is a simple method of estimating working capital requirements. According to this method, on the basis of past experience between sales and working capital requirements, a ratio can be determined for estimating the working capital requirements in future. For example, if the past experience shows that working capital has been 25% of sales and it is estimated that the sales for the next year would amount to Rs.1 lakh, the amount of working capital requirement can be assessed as Rs. 25,000.
Tags : Financial Management - WORKING CAPITAL MANAGEMENT
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