Cc limit

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

03 September 2016 Sir i prepared a balance sheet for obtaining 40 lac cc limit but i have some doubt regarding ratios. Kindly suggest me which ratio more important for obtaining cc limit.

Expert : Anonymous

Expert : Anonymous (Expert)

03 September 2016 Dear User, For this u need to take our professional service as its mandatory to get it verified by CA

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

18 July 2024 When preparing a balance sheet to obtain a CC (Cash Credit) limit from a bank or financial institution, several financial ratios play a crucial role in assessing the creditworthiness and financial health of your business. Here are some key ratios that are typically considered important:

1. **Current Ratio:**
- This ratio indicates the company's ability to pay its short-term obligations with its short-term assets. It is calculated as Current Assets divided by Current Liabilities.
- A higher current ratio (usually above 1.5) is generally preferred by lenders as it suggests sufficient liquidity to cover short-term obligations.

2. **Quick Ratio (or Acid-Test Ratio):**
- This ratio provides a more stringent measure of liquidity by excluding inventory from current assets. It is calculated as (Current Assets - Inventory) divided by Current Liabilities.
- A quick ratio of 1 or higher is typically considered acceptable, indicating the ability to meet short-term obligations without relying on inventory sales.

3. **Debt-to-Equity Ratio:**
- This ratio measures the proportion of debt financing relative to equity financing in the business. It is calculated as Total Debt divided by Total Equity.
- A lower debt-to-equity ratio indicates lower financial risk and may be more favorable to lenders.

4. **Debt Service Coverage Ratio (DSCR):**
- This ratio evaluates the company's ability to service its debt obligations, including interest and principal payments. It is calculated as Earnings Before Interest and Taxes (EBIT) divided by Total Debt Service (interest + principal payments).
- A DSCR of 1.2 or higher is generally required by lenders to ensure that the business generates sufficient cash flow to cover its debt obligations.

5. **Gross Profit Margin:**
- This ratio measures the profitability of the company's core business activities. It is calculated as (Gross Profit / Revenue) * 100.
- A higher gross profit margin indicates better profitability and helps in assessing the company's ability to generate sufficient cash flow.

6. **Operating Profit Margin:**
- This ratio indicates the profitability from core operations, excluding non-operating expenses. It is calculated as (Operating Profit / Revenue) * 100.
- A higher operating profit margin reflects better operational efficiency and profitability.

### Importance of Ratios for CC Limit:

- **Risk Assessment:** Banks use these ratios to assess the financial risk associated with lending. Higher ratios often indicate better financial health and lower risk.

- **Liquidity and Cash Flow:** Ratios like Current Ratio and Quick Ratio assess the company's liquidity position, which is crucial for meeting short-term obligations including the CC repayment.

- **Profitability and Repayment Capacity:** Profitability ratios (Gross Profit Margin, Operating Profit Margin) and DSCR help banks evaluate the company's ability to generate sufficient profits and cash flow to service the CC.

### Conclusion:

When preparing your balance sheet and financial statements for obtaining a CC limit, focus on these key ratios to demonstrate your company's financial strength, liquidity, profitability, and ability to service debt. It's also advisable to consult with a financial advisor or chartered accountant who can provide personalized guidance based on your specific business and financial situation. This will ensure that you present a strong case to the bank or financial institution and enhance your chances of obtaining the desired CC limit.

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow