Working Capital Calculator
Two numbers decide whether your application succeeds: what your business genuinely needs, and what the bank's formula will produce. They are rarely the same. This works out both, so you know which case you are walking in to argue.
Your business numbers
Take the day figures from your last full year. Rough numbers are fine; the result changes far more with the cycle than with a few lakh of turnover.
Your operating cycle
The number of days between paying for stock and being paid for it. Every one of those days is cash you have to fund from somewhere.
Your cash is locked for 75 days. At your projected turnover that is Rs.37,808 of sales every day, so each day you shave off the cycle frees roughly that much cash.
The turnover method covers your requirement. A bank would sanction up to Rs.27.6 L against a genuine need of Rs.23.4 L. Do not draw the full limit simply because it is available. Interest accrues on what you use.
Your own funds in the business are Rs.5.0 L against a required margin of Rs.6.9 L. That shortfall of Rs.1.9 L is a common reason working capital applications are cut back, and it is checked before anything else.
KarobarUdhar Insider Tip
Most owners walk into a bank with a number based on what they want. The credit officer computes a number from the turnover method and the two rarely match. Bring the operating cycle working with you. A file that shows inventory days, receivable days and payable days with a stock and debtor statement behind them gets assessed on the cycle method, which usually produces a larger limit than the flat turnover formula for a business with a long collection cycle.
KarobarUdhar Insider Tip
Cutting receivable days is worth more than negotiating your interest rate. At the numbers above, every single day you take off collections frees roughly Rs.37,808 of cash permanently. Collecting ten days faster is worth about Rs.3,78,082, which at a 14% cash credit rate saves around Rs.52,932 of interest every year, on top of the cash itself. A rate negotiation of half a percent on this limit is worth roughly Rs.13,800.
Indicative only. The turnover method figures follow common bank practice, where working capital requirement is taken as 25 percent of projected annual turnover with the bank funding 20 percent and the borrower providing a 5 percent margin. Individual banks apply their own norms, and larger limits are usually assessed on a full projected balance sheet rather than either shortcut method.
Why owners and banks arrive at different numbers
A business owner works out working capital from experience. Stock sits for so many weeks, customers pay after so many days, suppliers allow so much credit. The gap between those is money that has to come from somewhere, and the owner usually knows roughly what that costs.
A credit officer assessing a limit under the turnover method does none of that. The requirement is taken as a flat proportion of projected turnover, and the operating cycle does not enter the calculation at all. For a business that collects in thirty days the formula is generous. For a business that collects in ninety, it falls short, and the shortfall is read as an unjustified ask rather than a genuine need.
That is the entire reason this calculator shows two figures rather than one. If the cycle number is materially higher than the formula number, the conversation to have with your bank is about the method of assessment, not about the amount.
How to use it
- Enter your turnover and expected growth. Use last full year turnover. The limit is assessed against projected turnover, so growth matters.
- Take your cycle days from your books. Inventory days, receivable days and payable days. Averages across the year are more honest than a single month.
- Enter your own funds already in the business. Capital and retained earnings working in the business reduce what you need to borrow and count towards margin.
- Compare the two numbers. The operating cycle figure is what your business needs. The turnover method figure is what a bank will usually sanction. Where they differ, decide which case you are going to argue.
Common questions
How do banks decide a working capital limit?
Most banks use the turnover method for smaller limits. Working capital requirement is taken as 25 percent of projected annual turnover, of which the bank funds 20 percent and the borrower brings 5 percent as margin. Larger limits are assessed on projected financials instead. The turnover method ignores your actual operating cycle entirely, which is why a business with slow collections is routinely under-sanctioned.
What is an operating cycle and why does it matter?
It is inventory days plus receivable days minus payable days. It measures how long your cash is locked between paying for stock and being paid for the sale. A business with a 90 day cycle needs roughly a quarter of its annual turnover funded at any moment. A business with a 20 day cycle needs far less for the same turnover.
Why is my sanctioned limit lower than what I asked for?
Usually because the bank assessed on the turnover method while you asked for your genuine requirement. If your operating cycle is long, the formula produces a smaller number than your business needs. Taking the cycle working to the bank, backed by a stock and debtor statement, gives the credit officer grounds to assess on the cycle method instead.
Should I take the full limit that is sanctioned?
No. A cash credit or overdraft limit charges interest on the daily outstanding, not the sanctioned amount, so an undrawn limit costs little beyond a commitment charge. Draw what the cycle needs and repay when collections come in.
What is margin money on a working capital facility?
The share of the requirement the bank expects you to fund from your own resources, typically 5 percent of projected turnover under the turnover method or 25 percent of current assets under other methods. A shortfall against the required margin is one of the first things checked and a common reason a limit is cut back.