1. Background
A hypothetical MSME manufacturer in Telangana expects turnover of Rs 6 crore next year and seeks a cash credit limit.
2. Facts and assumptions
Projected turnover Rs 6 crore; raw material holding 30 days of material cost (material cost 60% of turnover); finished goods 15 days of cost of sales (85% of turnover); receivables 45 days of sales; creditors 30 days of material cost.
3. Applicable law or financial principles
Financial principles of working capital assessment (operating cycle method). Banks apply their own lending policies and RBI guidelines.
4. Analysis
Raw material = 6 crore x 60% x 30/365 = Rs 29.6 lakh. Finished goods = 6 crore x 85% x 15/365 = Rs 21.0 lakh. Receivables = 6 crore x 45/365 = Rs 74.0 lakh. Creditors = 6 crore x 60% x 30/365 = Rs 29.6 lakh.
5. Calculations
Gross working capital = 29.6 + 21.0 + 74.0 = Rs 124.6 lakh. Net working capital requirement = 124.6 - 29.6 = Rs 95.0 lakh.
6. Outcome
The business prepares CMA data supporting a cash credit request of around Rs 70-75 lakh with promoter margin for the rest.
7. Key learning
Shorter receivable days reduce borrowing needs more than any other lever here.
8. Limitations
Simplified; actual assessment depends on bank policy, margins and projected financials.
9. Disclaimer
This is a hypothetical case study. Names and figures are illustrative and do not relate to any client.