WHAT IS WORKING CAPITAL?
The term working capital means the number of funds needed for meeting the day-to-day operations of a concern. Operating cycle means the length of time required to convert ‘Non-Cash current assets’, (like raw material (RM), work in process (WIP), finished goods (FG), and receivables) into cash. To assess the working capital financing requirements, the gross working capital, the net working capital and the gap in working capital are calculated.
Working capital is simply considered the lifeblood of any business the lack of which may lead the business to liquidation.
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SIMPLIFIED TURNOVER METHOD
The simplified Turnover Method is used to assess the working capital requirement of the business enterprises. It is based on the turnover of business enterprises. This method was proposed by the P.J. Nayak Committee for the Small Scale Industries in India in need of working capital from banks up to a maximum limit of Rs 5 crores.
METHOD OF ASSESSING WORKING CAPITAL REQUIREMENT
As per this method, the working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as net working capital (NWC) and the bank providing finance at a minimum of 20% of the turnover.
If the projected sales turnover is = Rs.1,00,000
Then, the working capital gap is 25% of turnover = Rs.25000
The minimum permissible Bank Finance should be 20% of turnover = Rs. 20,000
Margin money from the borrower should be 5% of Rs. 100000 = Rs.5000
The method is applicable for financing MSME units up to Rs.5 crores and for others up to Rs.2 crores.
BENEFITS OF SIMPLIFIED TURNOVER METHOD
- This method is very simple and easy to understand.
- This method is very useful for ascertaining the working capital requirements of SSI trading in India
Thus, the banks should adopt the simplified turnover method recommended by the Nayak committee in respect of all SSI units for the calculation of the working capital limit.