Page 231 - DMGT405_FINANCIAL%20MANAGEMENT

3rd Method
Rs.
2nd Method
1st method
370
370
Less: current
92
Less: Core current
95
150
25% of above from
liabilities other than
long-term sources
assets (illustrative
bank borrowings
figure) from long
term sources
220

275
Working capital

278

Real current assets
69
Less: Current
Total current assets 370 Total current assets Rs. Total current assets Rs.
150
liabilities other 25% of above from
than bank long term sources
borrowings Unit 10: Working Capital Management
Maximum bank 128 206
borrowings
permissible
25% of above from 55 Less: Current 150 Notes
long term sources liabilities other than
bank borrowings
Maximum bank 165 Maximum bank 56
borrowings borrowings
permissible permissible
Excess borrowings 35 Excess borrowings 72 Excess borrowings 144
(200 – 165) (200 – 128) (200 – 56)
Current ratio 1.17:1 Current ratio 1.33:1 Current ratio 1.79:1
_370_ _370_ _370_
315 278 206

The amount of maximum permissible bank finance as per the recommendations of Tandon
Committee, based on three methods is calculated as follows with the help of another example.
Example: Following is the balance sheet of XYZ Ltd. Calculate the amount of maximum
permissible bank finance by all the three methods for working capital as per Tandon Committee
norms. You are required to assume the level of core current assets to be 30 lakhs.
You are also required to calculate the current ratios under each method and compare the same
with the current ratios as recommended by the Committee, assuming that the bank has granted
MPBF.
Balance Sheet of XYZ Ltd.
As on 31st March 2000
( In lakhs)
Liabilities Assets
Equity shares Rs. 10 each 200 Fixed assets 500
Retained earnings 200 Current assets
11% debentures 300 Inventory:
Public deposits 100 Raw materials 100
Trade creditors 80 W.I.P. 150
Bills payable 100 Finished goods 75 225
Debtors 100
Cash / Bank 55 480
980 980

Solution:
1. The amount of maximum permissible bank finance (MPBF) by the different methods of
Tandon Committee norms can be calculated as follows:
1st Method = 75% (current assets – current liabilities)
= 75% ( 480 – 180) lakhs

= 75% ( 300) lakhs
= 225 lakhs
2nd Method = 75% of current assets – current liabilities

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