A working-capital limit has two numbers. The sanctioned limit is the most the bank will lend. The drawing power is what you can actually draw this month, and it is worked out from the stock and debtors statement you submit.
How drawing power is usually worked out
The details come from your sanction letter, but the usual shape is:
- Take stock at cost or market value, whichever is lower.
- Take off what you owe suppliers for it, because the bank lends against stock you have paid for.
- Take off the margin on stock, often around a quarter.
- Add debtors within the agreed age, often 90 days, less the margin on debtors.
- The total, or the sanctioned limit if lower, is the drawing power.
A short example
| Item | Amount |
|---|---|
| Stock at cost | ₹80,00,000 |
| Less: creditors for goods | (₹20,00,000) |
| Paid-for stock | ₹60,00,000 |
| Less: margin at 25% | (₹15,00,000) |
| Drawing power on stock | ₹45,00,000 |
| Debtors up to 90 days | ₹40,00,000 |
| Less: margin at 25% | (₹10,00,000) |
| Drawing power on debtors | ₹30,00,000 |
| Total drawing power | ₹75,00,000 |
If the sanctioned limit is ₹1 crore, this business can draw ₹75 lakh this month, not ₹1 crore. The margins and the 90 days here are illustrative; yours are in the sanction letter.
What the bank leaves out
- Stock that is obsolete, damaged or slow-moving
- Stock held on behalf of others, such as material received for job work
- Debtors older than the agreed period, and amounts due from group concerns
- Uninsured stock, where the sanction requires insurance
What the bank compares it with
- Your books: stock, debtors and creditors on the statement date
- GST returns: sales and purchases for the period
- Earlier statements: sudden jumps or a figure that never moves
- The stock auditor's count, usually once a year
A difference is not always an error, but have the explanation ready. A statement prepared from the books, with a working that someone else can follow, avoids a dispute.
Keeping it in step
- Prepare the statement from the stock records, not from memory of last month's figure.
- Value stock the same way each month, and the same way as in the annual accounts.
- Age the debtors every month, and take the old ones out before the bank does.
- Keep the working with the statement.
Before relying on this article: the method, margins and periods are set by each bank's sanction terms. Use yours.
