28 December 2012
Drawing Power is the amount of Working Capital funds the borrower is allowed to draw from the Working Capital limit alloted to him. Because the working capital limit is usually alloted to a borrower against security of Stock and Book Debts, the amount of funds a borrower is allowed to draw is calculated by considering the total value of Stock plus total value of Book Debts for the month after deducting the margin. Margin is the component of funds raised from long term sources such as Share Capital and Term Finance (Long Term Loans). It is for this purpose that the borrower must regularly submit Stock and Book Debts Statement and Statement of Trade Creditors. Working Capital funds are a kind of Short Term Finance mostly used to purchase Raw Material. Trade Creditors (Sundry Creditors ) are those from whom the company purchases raw material on credit basis. Thus, in a way Trade Creditors also finance the borrower's stock and hence the stock purchased under credit being unpaid stock, cannot be provided as security to Bank. Hence total amount of trade credit received by a company in a month must also be deducted from total stock value to find out the actual value of stock available to the Bank as security. An example will clarify the above theory. Suppose the Stock Position of a Company 'X' as on 31.03.2010 is as follows(Rs in lacs) : 1. Total Value of Stock(S) : 35.00 2. Total Value of Trade Creditors(C) : 10.00 3. Total Value of Debtors(D) : 25.00 Margin is 25% on Stock and 40% on Book Debts Calculation of Drawing Power : DP = (S-C)*0.75+D*0.60 = (35-10)*0.75+25*0.60 = 33.75 lacs
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