Essay About Cycle Method Drawing Power Method And Acquisition Of Raw Materials

Methods of Working Capital Assessment
Methods of Working capital assessment Operating Cycle Method Drawing Power Method. Turnover Method.MPBF method (II method of lending) for limits of Rs 6.00 crores and above Cash Budget method  –  Based on procurement and cash inflow) . It is mainly used for Seasonal Industries (Sugar/ Rice Mills/Textiles/Tea/Tobacco/Fertilizers)  Contractors & Real Estate Developers , Educational Institutions, etc.Operating Cycle MethodMeaning of  operating cycle:It begins with acquisition of raw materials and ends with collection of receivables. Stages: 1)Raw materials (RM/RM consumption)2)Work-in-process (WIP/COP)3)Finished Goods (FG/COS)4)Receivables (Debtors/Credit sales)Less: Creditors (creditors/purchases)Example of Operating Cycle:Length of operating Cycle:Procurement of raw material : 30 daysConversion/process time : 15 daysAverage time of holding of finished goods: 15 daysAverage collection period : 30 daysTotal operating cycle : 90 daysOperating cycle in a year : 4Total operating expenses per annum : Rs.60 lacs Total turnover per annum : Rs.70 lacs Working capital requirement : 60/4= 15 lacs Drawing Power (DP) Method :(for units with small limits)Drawing power is arrived at  on the basis of valuation of current assets charged to  the bank in the shape  of hypothecation and  assignment , after deducting the  stipulated marginIllustration:Paid stock – 4   Margin 25% – DP  = 3