Thus the need for working capital arises from the prevalence of credit in business transactions, need

to fund manufacturing and support and to account for the variations in the supply of raw material
and demand for finished goods.

Characteristics of working capital

It is continually required for a going concern

However, the quantum of working capital fluctuates depending on the level of activity

Working Capital is impacted by numerous transactions on a continual basis

The financing limits are granted based on assessment of the working capital requirement.

The Bank Financing Limit is fixed on an annual basis. However, since such limit is provided to meet
specific requirements, utilizing the limits is subjected to the Drawing Power, which is decided on a
monthly/ quarterly basis.

The effective bank financing is therefore to the extent of the lower of:

Bank Financing Limit: Determined on an annual basis based on an assessment of the current year’s
projections and the actuals for the previous year.

Drawing Power: Linked to the quantum of current assets (and current liabilities) owned by the
business with appropriate margins. Fixed on a monthly/ quarterly basis depending on the
submission of Monthly/Quarterly Information System returns indicating the position of the stock
statement, receivables, Work in Progress, payables, etc.
Assessment of working capital requirement
1) Tandon Committee (MPBF – 3 methods)
2) Nayak Committee (Projected Annual Turnover
Method)
3) Kannan Committee (Cash Budget Method)
Conditions of Kannan Committee