Interpretation of Balance Sheet

Presentation of Training Centre Mumbai

Banks are concerned about the financial strength and the performance of the borrowers. It is necessary that all borrowers are of good credit risk and there should not be any shadow of doubt about the safety of the fund lent. The investigation process carried out by the Bank for taking a credit decision is called Credit Analysis.
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The system or approach for analysis a balance sheet depends upon the purpose for which the study is undertaken. Our purpose of analyzing the financial statement is different from that of an investor, government authority etc. Statement analysis is analysis of financial statement alone, while the decision should be taken only on the basis of total analysis or appraisal of all the relevant information which included analysis of financial statements.
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Types of Credit facility

Fund based : Overdraft / Temporary Overdraft / DAUE Cash Credit against stock / Book Debts Packing Credit / FBP / FBD / PCFC / FBP & FBD in Foreign Currency. Demand Loan Term Loan BP/BD Line of Credit Bridge Loan Baroda 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 assets and liabilities of the concern as on a particular date. The position of assets and liabilities of concern is influenced by its operations 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 also indicates the sources of funds and the utilization thereof.
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Any business enterprises whether engaged in manufacturing or purely trading activity, has to have sufficient capital to finance both, its fixed and long term assets, viz. land, building, machineries etc. and to maintain certain level of short term assets for conduct of day to day business activities / production schedule. Such short term assets, which are required for day to day operation, are called the current assets.
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Two parts of Balance Sheet

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 concern for 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 the ability of the concern to perform the well and make a reasonable profit and this information will be available only in the P& L account.
A weak balance sheet may not be necessarily represent a bad credit risk 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.
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Balance sheet is prepared as per the Company Act. Re-classification of assets and liabilities as per our requirements. Liabilities which are the sources of funds, should be grouped under the two major categories viz. long term liabilities 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 Premium Account (Own Fund) etc. Debenture and public deposits, excluding the amount maturing for repayment with in next 12 months. Redeemable Preference shares maturing within 10 years and not within 10 years and not within next 12 months. All Term borrowings, both secured and unsecured from banks and financial institutions excluding installments falling due within the next 12 months. All deferred payment liabilities, excluding installments/accepted bills maturing during the next 12 months. 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 as current liabilities. These liabilities are due for payment within the next 12 months, which includes the following :Sundry creditors including Bills Payable Short term borrowings, including outstanding bills discounted/purchased with banks (both secured and unsecured) Interest and other charges accrued and outstanding/not due for payment. 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 Loans Statutory 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 be ensured that it 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 financing fixed assets.

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Current Assets
Cash & Bank balance Raw materials Stock in process Finished goods Receivables Amount due from partners / associate concern Advance to suppliers of raw materials Advance payment of taxes Other trade advance Pre-paid expenses Not to include : Doubtful debts Receivables maturing after 12 months Advance for capital expenditure
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Working capital cycle

Cash / Bank Balance Raw Material
Sundry Debtors

Stock in Process

Finished Goods

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Net Working Capital

Liabilities
Capital + Res. & Surplus

Assets
Fixed Assets

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

Net working Capital Current liabilities

Total

Current Assets

Total

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Various Methods of Lendings for working capital limit

1. 2 3 4

Tondon/Chore committee recommendations. First Method of Lending (CR 1.17:1) Second Method of Lending. (CR 1.33:1) Nayak Committee Recommendations of SSIs. Vaz Committee Recommendations for SSIs. Turnover Method i..e 20% of projected Gross Sales. Our Banks Permissible Bank Finance System Turnover Method 1st Method of Lending 2nd Method of Lending Cash Budgeting Method

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TURNOVER METHOD
Sr. No. Actual FY 2011 Estimated FY 2012

1
2 3 4

Last year Sales

Estimated/Projected Sales* Sales up to the current month Accepted level by Bank

NA
100.00 NA 100.00

NA
150.00 NA 150.00

5
6 7 8 9

25% of above
Less : 5% of accepted sales Projected NWC PBF (5-6 or 7)whichever is higher Limit Requested

25.00
5.00 5.00

37.50
7.50 8.50

20.00
20.00

29.00
30.00

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First Method of Lending

FINANCIAL NORMS

Actual FY 2010-11 (1) 100.00 20.00

Estimated FY 201112 140.00 25.00

Current AssetsLess:-Current Liabilities (except Bank borrowing) Working Capital Gap 25% of WCG Estimated / Projected NWC

(2)
(3) (4) (5)

80.00 20.00 20.00 60.00 Nil

115.00 28.75 35.00 80.00 Nil

PBF (3 minus 4 & 5 whichever is higher) Excess borrowings

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Second Method of Lending

FINANCIAL NORMS Actual FY 2010-11 (1) Estimated FY 2011-12

Current AssetsLess:-Current Liabilities (except Bank borrowing) Working Capital Gap 25% of Current Assets Estimated / Projected NWC PBF (3 minus 4 & 5 whichever is higher) Excess borrowings
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100.00
(2) (3) 80.00 (4) (5) 25.00 20.00

140.00
25.00

115.00 35.00

20.00
60.00 5.00

35.00
80.00 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 WORKING CAPITAL REQUIREMENTS

1. 2.

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. Pre-sales facilities Post-sales facilities Chargeable Current Assets Margin on Chargeable Current Assets Pre/Post sale limits Peak Level and Non Peak Level Limits.
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As per loan Policy Current Ratio = Current Assets Current liabilities Debt Equity Ratio = (TTL/TNW) Debt Equity Ratio = TOL/TNW Fixed Assets Coverage Ratio for Term Loan Debt Service Coverage Ratio * In any year it should not be below 1.25 ( for Micro and SE 1.00) 1.33 3:1 4.50

SME Loan Policy SE 1.17 ME 1.20 3:1 4.50

More than 1 Not below 1.25 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 of finance? What is likely to be happen after financing?

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Training Centre, Mumbai

Inventing Methods for Igniting Minds