10/13/2023 0 Comments Working capital turn overUpto which amount working capital can be assessed and sanction under Nayak Committee/ Turnover method? Actual drawals may be allowed on the basis of drawing power to be determined by banks after excluding unpaid stocks. On the other hand if the assessed credit requirement is lower than the one assessed on projected turnover basis, the credit limit can be sanctioned at 20 per cent of the projected turnover. If the credit requirement based on production/ processing cycle is higher than the one assessed on projected turnover basis, the same may be sanctioned. As per RBI guidelines, Working capital credit limits should be assessed both as per projected turnover basis and traditional method. No, this is the minimum bank finance for the MSME unit. Whether 20% of the projected turnover is the maximum that bank can finance? For example if projected NWC is Rs.7 lakh, Bank finance will be (Rs.25 lakh – Rs.7 Lakh) = Rs.18 lakh. However, if projected Net Working Capital of the borrower is more than Rs.5 lakh, bank finance will be reduced accordingly. Hence, the working capital to be financed by bank is (25-5) – Rs.20 lakh. The margin of the borrower will be 5% of the projected sales turnover (5% of 100) = Rs.5 lakh Working capital limit is computed as per Turnover method as under:įor example, the projected annual turnover of ABC Company is Rs 100 lakh for the FY 2018-19.Īccording to turnover method, working capital requirement of the unit is 25% of Rs.100 lakh = Rs.25 lakh How working capital is assessed under Simplified Turnover method or Nayak Committee method? Out of the said Working Capital requirement, 5% requirement to be met by the borrower from his own sources and balance 20% to be financed by lending bank. Nayak Committee for the Small Scale Industries in India in need of working capital from banks.Īccording to this method, the working capital requirement of the MSME unit is calculated at 25% of annual projected turnover. This method was originally suggested by the P.J. Simplified Turnover Method is used to assess the working capital requirement of any borrower based on the turnover of the business. Read: Detailed article on Working Capital. It is very important since lack of working capital will lead a business to technical insolvency and then to liquidation. Now, in order to assess the working capital financing requirements, the gross working capital, the net working capital and gap in working capital are calculated. The operating cycle refers to the total time required to convert non-cash assets such as raw materials, receivables etc. It refers to the sum of funds invested in various current assets that are used in the operating cycle. In order to understand the Turnover Method for working capital finance, we need to first understand the term working capital.
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