Page 142 - DMGT521_PROJECT_MANAGEMENT

Unit 9: Financial Estimates and Projections

exhaust its debt capacity. Put differently, it maintains reserve borrowing powers to enable Notes
it to raise debt capital to meet largely unforeseen future needs.

Did u know? In some countries, the proposed means of finance for a project must either be
approved by a regulatory agency or conform to certain norms laid down by the government
or financial institutions in this regard.

9.3 Working Capital Requirement and its Financing

In estimating the working capital requirement and planning for its financing, the following
points have to be born in mind:
1. The working capital requirement consists of the following: (i) raw materials and
components (indigenous as well as imported), (ii) stocks of goods-in-process (also referred
to as work-in-process), (iii) stocks of finished goods, (iv) debtors, (v) operating expenses
and (vi) consumable stores.
2. The principal sources of working capital finance are: (i) working capital advances provided
by commercial banks, (ii) trade credit, (iii) accruals and provisions, and (iv) long term
sources of financing.
3. There are limits to obtaining working capital advances from commercial banks. They are
in two forms: (i) the aggregate permissible bank finance is specified as per the norms of
lending, followed by the lending bank, (ii) against each current asset a certain amount of
margin money has to be provided by the firm.
4. The Tandon Committee has suggested three methods for determining the maximum
permissible amount of bank finance for working capital. The method that is generally
employed now is the second method. According to this method, the maximum permissible
bank finance is calculated as follows:

Current assets as per the norms laid Non-bank current liabilities like

down by the Tandon Committee (0.75) trade credit and provisions

The implication of this norm is that at least 25 percent of current assets must be supported
by long-term sources of finance.

5. The margin requirement varies with the type of current asset. While there is no fixed
formula for determining the margin amount, the ranges within which margin requirements
for various current assets lie are as follows:
Current Assets Margin
Raw materials 10-25 percent
Work-in-process 20-40 percent

Finished goods 30-50 percent
Debtors 30-50 percent

9.3.1 Profitability Projections (or Estimates of Working Results)

Given the estimates of sales revenues and cost of production, the next step is to prepare the
profitability projections or estimates of working results (as they are referred to by term lending

LOVELY PROFESSIONAL UNIVERSITY 137