Turnover Method for Working Capital Requirement (Hindi) - YouTube

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Namaskar, my name is Mukul and welcome to asset Yogi.

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In this video, we will see the turnover method for calculating working capital requirement

In the last two videos also we have seen two methods of working capital assessment.

In which we saw the operating cycle method.

Then we saw the drawing power method.

In this video, we will see how banks assign your working capital.

There are RBI guidelines for assigning these limits.

Which is based on the recommendation of the Nayak Committee.

We will know exactly what the norms of the Nayak Committee

And how is your working capital limit calculated?

Let's move straight to the blackboard

Let us see how you can do the working capital assessment with the turnover method.

We have already discussed the operating cycle method and the drawing power method.

In this video, we will see what is your working capital requirement in the business

And what limit can be a sensation to you in the bank?

So how can we calculate with the turnover method?

The turnover method was recommended by the Nayak Committee.

Which we also called Nayak committee norms.

So the bank assigns you a sanctioned limit based on the working capital requirement.

What is the maximum working capital you are eligible for?

The turnover method is used for its calculation.

So if we talk about the requirements in the small-scale industries.

If your working capital requirement is up to ₹5 crores.

So this method is applicable.

And for other industries, this method can be used for

working capital requirements of up to ₹1 crore.

But suppose if your working capital requirement in the small scale industry

is more than ₹5 crore

And or else there is a requirement of more than one crore in other industries.

So in that case MPBF method is used

We will discuss this in the next video.

Let us now talk about how the turnover method works.

So in this, the assumption is taken that you will run 4 operating cycles in 1 year

what is the operating cycle

I have made a very detailed video on this

it means that

Let me explain to you once in short.

Suppose you have bought raw material

And you converted raw material into work in progress.

And then they turned into finished goods.

Right

After that, you do not get the money immediately.

So your debtors are made.

Your customers may not pay you money immediately

After some time you get money

So this is the total cycle.

The duration takes to convert cash back into cash.

We call the whole business operating cycle an operating cycle.

So if you complete four operating cycles in 1 year.

or even less

Yet this method assumes that you will complete at least four cycles.

That means it is assuming your one operating cycle for 3 months duration.

Right

So if an operating cycle would be 3 months duration.

So you will complete four operating cycles in 1 year.

Your money will rotate four times.

Right

So working capital requirement

Because it is rotating four times.

So it naturally becomes one fourth.

Because you need money to operate an operating cycle.

You need money for all the expenses during the interval of this cycle.

Hence working capital is assumed to be 25% of your projected annual turnover

Right

And it also states that the working limit that the bank will assign to you

Will be a minimum of 20% of sales.

And out of 25% of sales, you have to spend 5% from your pocket.

So 5% is your margin

What is its main logic?

Suppose if you have sales

So the working capital of sales is 25% of sales

Right

Now the bank says

Or the Nayak committee has applied a logic

That the bank will give 80% of it to you.

80% of this 25%.

And the remaining 20% ​​you will spend.

That means it's the margin.

So here it is 80% of 25%.

Right

So here also you have to multiply by 25% and 20%

so how much will it be, it will be 20%

And it will come 5%

So 20% of sales

The bank assigns the working capital to you.

This is your minimum working capital limit.

The bank will surely assign you this much minimum working capital.

The remaining 5% of sales is your margin.

keep one thing in mind, suppose your operating cycle is more than 3 months.

So you can be assigned Minimum Working Capital Limited even more than this.

More than 25% of sales can be assigned.

But you have to prove that your operating cycle is more than 3 months.

And if your operating cycle is less than of 3 months

Suppose your operating cycle is only 2 months

Even then your minimum working capital limit will be calculated accordingly.

You will surely get the minimum working capital limit of 25% of sales.

Right

So according to this your minimum working capital limit is assigned.

Let us understand this with an example also.

Suppose your sales are one crore in 1 year.

So here I write 100 lakhs of sales

So out of this one crore, its 25%

Let's say 25% of 100 crores is equal to 25 lakh is your working capital requirement

Right

Out of this 25%

20% of hundred lakhs

20% of 100 lakhs is equal to 20 lakhs

This is your minimum working capital limit.

which bank will assign you

Right

And the rest 5% of sales.

5% of 100 lakhs

This 5,00,000 will be your margin money which you have to pay from your pocket.

One more thing to note.

If you are assigned a minimum working capital limit of 20 lakhs

So it does not mean that you can withdraw 20 lakhs rupees every month.

It is decided by the drawing power.

Drawing power is calculated differently,

drawing power depends on your monthly receivables

And how much your inventories and stocks are

I have already made a video on drawing power so watch my video.

We discussed this in the previous video.

So in that, you will understand how drawing power is calculated.

So once the bank has assigned your working capital limited

So that means you can't withdraw more money than that.

If the drawing power is more than that

Even then you cannot withdraw more than the working capital limit.

So in this procedure, the bank also checks your background.

What type of background check does the bank do?

First, the bank satisfies itself whether the projected turnover you have given

is correct or not.

And how does the bank do it?

Bank will check sales and sales figures of last 2 years

And check the growth rate.

And the bank will say that you can take a reasonable growth rate.

Let's say you can take within 25% growth rate

Then the bank can accept it quite easily.

Let's say there is 10% to 20% growth in the first 2 years.

So maybe it will agree within 25%.

Otherwise, if you want more deviation You are showing a higher growth rate.

So you have to provide proof to support it.

Let's say you already have some orders in your business.

So you will have to show it to the bank and satisfy the bank.

then as I said after the assignment of Working Capital Limited

You cannot withdraw the full amount. It depends on the drawing power.

So this is how the turnover method works.

In the next video, we will see the MPBF method.

That's how it works when your SSI units require more than 5 crores working capital

and others have more than one crore working capital requirements.

I have tried to cover all the major points in this video.

However, if there was any missed point or you want to add something

So you can comment below.

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