10 June 2021
1.Important factors that are requested to be considered while prepared estimated and provisional and projected profit and loss, balance sheet (like gross profit and net profit precentages)and other factors can be taken of while prepared estimated and provisional and projected and 2.how to calculate procedure drawing power 3.drawing power and sanctioned limit difference
07 July 2024
Sure, let's address each of your questions:
### 1. Factors to Consider in Estimated, Provisional, and Projected Financial Statements:
When preparing estimated, provisional, or projected financial statements (like profit and loss, balance sheet), several important factors should be considered:
- **Sales Forecast:** Based on market research, historical data, and expected market conditions. - **Cost Structure:** Including fixed and variable costs, and their sensitivity to changes in business volume. - **Gross Profit Margin:** Calculated as (Gross Profit / Sales Revenue) * 100, it indicates the efficiency of production and pricing strategies. - **Operating Expenses:** Including administrative, selling, and other expenses. - **Net Profit Margin:** Calculated as (Net Profit / Sales Revenue) * 100, indicating overall profitability after all expenses. - **Cash Flow:** Estimating cash inflows and outflows to ensure adequate liquidity. - **Capital Expenditures:** Planned investments in assets needed for future growth. - **Debt Servicing:** Projections for interest payments on loans and repayment schedules. - **Taxation:** Estimated tax liabilities based on projected profits.
### 2. Procedure to Calculate Drawing Power:
Drawing power refers to the maximum amount that a borrower can withdraw from their sanctioned credit limit. The calculation involves:
- **Stock:** Value of current stocks pledged as collateral, usually taken at a certain percentage of its market value (e.g., 50-75% depending on the type of stock). - **Book Debts:** Receivables pledged as collateral, adjusted for overdue invoices or doubtful debts. - **Other Collaterals:** Value of any other assets pledged (like FDs, property) after applying applicable haircuts. - **Margin Requirement:** The lender's requirement for maintaining a margin of safety, often a percentage of the value of collateral pledged.
**Formula for Drawing Power:** \[ \text{Drawing Power} = \left( \text{Value of Stock} + \text{Value of Book Debts} + \text{Value of Other Collaterals} \right) \times \text{Margin Requirement} \]
### 3. Difference Between Drawing Power and Sanctioned Limit:
- **Drawing Power:** It is the actual amount that can be borrowed or withdrawn from the sanctioned credit limit, based on the value of collateral pledged and the lender's margin requirement.
- **Sanctioned Limit:** It is the maximum credit limit sanctioned by the lender to the borrower, based on their creditworthiness, financial statements, and collateral value.
**Key Differences:** - **Calculation:** Drawing power is calculated based on the value of collateral, while sanctioned limit is determined by the lender based on various financial factors. - **Utilization:** Drawing power indicates the actual amount available for withdrawal or borrowing at a given time, whereas sanctioned limit is the maximum amount authorized by the lender.
Understanding and managing drawing power is crucial for businesses to effectively utilize their sanctioned credit limits while maintaining adequate collateral coverage.
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