Interpretation of BS

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Presentation of Training Centre

Mumbai

Interpretation of Balance Sheet


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Training Centre, Mumbai Inventing Methods for Igniting Minds

Banks are concerned about the financialstrength and the performance of theborrowers. It is necessary that all borrowersare of good credit risk and there should notbe any shadow of doubt about the safety ofthe fund lent.

The investigation process carried out by theBank for taking a credit decision is calledCredit Analysis.


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The system or approach for analysis abalance sheet depends upon the purposefor which the study is undertaken. Ourpurpose of analyzing the financial statementis different from that of an investor,

government authority etc.

Statement analysis is analysis of financialstatement alone, while the decision should

be taken only on the basis of total analysisor appraisal of all the relevant informationwhich included analysis of financialstatements.


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Types of Credit facility

Fund based :-Overdraft / Temporary Overdraft / DAUE Cash Credit against stock / Book DebtsPacking Credit / FBP / FBD / PCFC / FBP & FBD in ForeignCurrency.Demand LoanTerm LoanBP/BDLine of Credit Bridge LoanBaroda Kisan Credit Card / BOB Laghu Udhyami Credit Card / Baroda Artisan Credit Card / Baroda / Exporter Gold Card / SME Gold Card etc.FCNR (B) Loan / External Commercial Borrowings.


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Balance sheet depicts the position of assetsand liabilities of the concern as on aparticular date. The position of assets andliabilities of concern is influenced by itsoperations during a given period.

In nutshell, it shows what the concern owes(liabilities) to others and what others owe to

it (assets) which should be equal. It alsoindicates the sources of funds and theutilization thereof.


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Any business enterprises whether engagedin manufacturing or purely trading activity,has to have sufficient capital to financeboth, its fixed and long term assets, viz.land, building, machineries etc. and tomaintain certain level of short term assetsfor conduct of day to day business activities

/ production schedule. Such short termassets, which are required for day to dayoperation, are called the current assets.


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Balance Sheet and Profit & Loss account are different in character.

Profit and Loss Account :-Profit and loss account shows the result of operations of the concernfor a given period.

P&L is important statement as it shows the income and expenditure of a concern during the year. The real protection to the lender is theability of the concern to perform the well and make a reasonable profitand this information will be available only in the P& L account.

A weak balance sheet may not be necessarily represent a bad creditrisk if profitability is good and improving from year to year. Conversely,a concern with a sound balance sheet may not be a good credit risk, if it is incurring losses consistently.

Two parts of Balance Sheet


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Balance sheet is prepared as per the Company Act.

Re-classification of assets and liabilities as per ourrequirements.

Liabilities which are the sources of funds, should begrouped under the two major categories viz. long termliabilities and current liabilities.

Assets will have to be classified in to four groups viz.

fixed assets, current assets, non current assets/miscellaneous assets and intangible / fictitious assets


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Liabilities

Long Term Liabilities :- Capital, Reserves & Surplus, Surplus of P&L, Share PremiumAccount ( Own Fund) etc.Debenture and public deposits, excluding the amountmaturing for repayment with in next 12 months.Redeemable Preference shares maturing within 10 years andnot within 10 years and not within next 12 months.All Term borrowings, both secured and unsecured from banksand financial institutions excluding installments falling duewithin the next 12 months.

All deferred payment liabilities, excludinginstallments/accepted bills maturing during the next 12months.Private borrowing payable after one year.Any other liabilities payable after one year


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Current Liabilities

All liabilities, other than term liabilities, are to be classified ascurrent liabilities. These liabilities are due for payment within thenext 12 months, which includes the following :-Sundry creditors including Bills PayableShort term borrowings, including outstanding billsdiscounted/purchased with banks (both secured and unsecured)Interest and other charges accrued and outstanding/not due forpayment.Advance received from customers & Deposit from dealers etc.Public deposits and/or debenture payable during the current year

Installments falling due within in next 12 months of Term LoansStatutory liabilities like PF, ESI, Sales Tax, Excise Duty etc.Provisions for payment of dividend, bonus, liabilities for exp,gratuity and other dues falling within next 12 months.


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Assets

Fixed Assets :-Land & Building, Plant & machineries, Equipments, Furniture& fixtures.Capital work in progress.

Banker Point view :-

When any increase in estimation / projection, then it is to beensured thatit is from long term sources i.e. Capital, Reserves & Surplus,Surplus P & L (Own Fund) etc. it is from other long term sources like Term Loan, raising

Debentures.In no case working capital should be diverted for financingfixed assets.


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Current Assets

Cash & Bank balance

Raw materialsStock in processFinished goodsReceivables

Amount due from partners / associate concernAdvance to suppliers of raw materialsAdvance payment of taxesOther trade advancePre-paid expenses

Not to include :-Doubtful debtsReceivables maturing after 12 monthsAdvance for capital expenditure


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Net Working Capital

Capital + Res. & Surplus Fixed Assets

Loan Term Borrowings i.e.T/L or Unsecured deposit

Investment

Net working Capital Current Assets

Current liabilities

Total Total


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Various Methods of Lendings for working capital limit

1. Tondon/Chore committee recommendations.First Method of Lending (CR 1.17:1)Second Method of Lending. (CR 1.33:1)

2 Nayak Committee Recommendations of SSIs.3 Vaz Committee Recommendations for SSIs.

Turnover Method i..e 20% of projected Gross Sales.4 Our Banks Permissible Bank Finance System

Turnover Method

1 st Method of Lending2 nd Method of LendingCash Budgeting Method


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TURNOVER METHOD

Sr.No.

ActualFY 2011

EstimatedFY 2012

1 Last year Sales NA NA2 Estimated/Projected Sales* 100.00 150.003 Sales up to the current month NA NA

4 Accepted level by Bank 100.00 150.005 25% of above 25.00 37.506 Less : 5% of accepted sales 5.00 7.507 Projected NWC 5.00 8.50

8 PBF (5-6 or 7)whichever ishigher 20.00 29.00

9 Limit Requested 20.00 30.00


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First Method of Lending

FINANCIAL NORMS ActualFY 2010-11

EstimatedFY 2011-

12

Current Assets- (1) 100.00 140.00

Less:-Current Liabilities

(except Bank borrowing) (2)

20.00 25.00

Working Capital Gap (3) 80.00 115.00

25% of WCG (4) 20.00 28.75

Estimated / Projected NWC (5) 20.00 35.00

PBF (3 minus 4 & 5 whichever is higher) 60.00 80.00

Excess borrowings Nil Nil


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Second Method of Lending

FINANCIAL NORMS ActualFY 2010-11 EstimatedFY 2011-12

Current Assets- (1)100.00 140.00

Less:-Current Liabilities

(except Bank borrowing) (2)

20.00 25.00

Working Capital Gap (3)80.00 115.00

25% of Current Assets (4) 25.00 35.00

Estimated / Projected NWC (5)20.00 35.00

PBF (3 minus 4 & 5 whichever is higher) 60.00 80.00

Excess borrowings 5.00 Nil


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Calculation of holding levels

Raw Materials :

Raw Material X 12 M or 360 days = day or months Raw Material Consumption

Stock in Process :Stock in Process X 12 M or 360 days = day or months Cost of Production


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Finished goods :Finished Goods X 12 M or 360 days = day or

months Cost of sales

Sundry Debtors:Sundry Debtors X 12 M or 360 days = day or

months Gross sales

Sundry Creditors:Sundry Creditors X 12 M or 360 days day or months Purchase


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CRITICAL ASPECTS OF ASSESSMENT OF WORKINGCAPITAL REQUIREMENTS

Basis of working capital assessment.Level of Holding of Current Assets.Seasonality of the product.Level of Holding of Current Liabilities.

Allocation of MPBF of sanctioned limits.1. Pre-sales facilities2. Post-sales facilities

Chargeable Current Assets

Margin on Chargeable Current AssetsPre/Post sale limitsPeak Level and Non Peak Level Limits.


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As per loanPolicy

SME LoanPolicy

Current Ratio = Current AssetsCurrent liabilities

1.33 SE 1.17ME 1.20

Debt Equity Ratio = (TTL/TNW) 3:1 3:1

Debt Equity Ratio = TOL/TNW 4.50 4.50

Fixed Assets Coverage Ratio for TermLoan

More than 1 Not below1.25

Debt Service Coverage Ratio* In any year it should not be below1.25 ( for Micro and SE 1.00)

1.75* 1.75*


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Credit Proposal must answer the following key questions

Who is to be financed ?What is to be financed?Why is to be financed?

How much to be financed?What should be the mode of finance ?What will be the terms and conditions offinance?

What is likely to be happen after financing?


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Documents

Interpretation of BS