How to prepare provisional and projected financial statements for bank loan purposes.
Provisional balance sheet:-
Provisional balance sheet is prepared at the ang specific date during the financial year. Generally balance sheet is prepared at end of quarter or year I.e 30th June, 30 Sept, 31st december and 31st march. But bank asks for a balance sheet on the date of application for loan. Assume last balance sheet of a firm was prepared on 31st march 2020 and today this firm submitted a loan application to a bank on date 2-5-2020 and bank may asks for provisional balance sheet as on date 2-5-2020(today). Hence to prepare provisional balAnce sheet as on 2-5-2020 following points are important:-
1. As provisional balance sheet is for period already ended hence all balances are actual and projected figures are not entered.
2. If some expenses/ incomes (like rent, interest on loan, tax etc) are due/paidbon monthly / quarterly / half yearly/ yearly basis then calculated related value of such expenses upto the date of balance sheet and post provisional entries or make manual direct adjustment in p&l account.
3. Take actual balances of all ledgers and prepare balance sheet.
Projected Balance sheet:-
For applying for bank loan , generally banks ask for three to 5 year projected balance sheet in addition to provisional balance sheet. Following are important points about projected balance sheet:-
1. Projected balance sheet is prepared for future period and all figures are projected/estimated not actual.
2. First projected balance sheet is prepared for the coming 31st march. For example if loan apply date is 2nd may 2020 then provisional balance sheet is prepared with balances as on 2nd may 2020 and first projected balance sheet is prepared today for 31st march 2021 then 31st march 2022 and so on…..
3. For projecting future balance , latest provisional balance sheet will be taken as base.
4. Future growth plans of our firm and future projected cash flows and taxation will be taken into account for estimating the projected balances on future dates.
5. Projected balances of all ledgers will be taken together to prepare projected balance sheet for future dates.
To process your loan application, bank is to check different ratios in your provisional and projected balance sheets. Details of all such ratios are filled in CMA data form of bank.
What is the difference between provisional and projected and estimated finicial statements.
Provisional balance sheet is prepared with past actual figures but prepared before end of financial year ( on any specific date before end of financial year and annually expenses or incomes are proportioned for related period .) But projected balance sheet is totally prepared with estimated figures for future dates.
Assess projected balance sheet values as on dt.31.03.2021 mentioned below.
1. Sundry creditors Rs.2,00,000/-
2. Sundry debtors Rs.1,50,000/-
3.closing stock as on 31.03.2021 Rs.3,00,000/-.
4.capital account Rs.3,00,000/-
5.cash on hand Rs.50,000/-.
Projected sales turnover 2020-2021. Rs.30,00,000/-.
How to calculation producure cc loan from banks for turnover based method.
WORKING CAPITAL REQUIREMENTS UPTO RS. 1 CRORE
- The assessment of working capital requirement of borrowers, other than SSI units, requiring fund based working capital limits upto Rs.1.00 crore and SSI units requiring fund based working capital limits upto Rs.5.00 crore from the banking system may be made on the basis of their projected annual turnover.
- In accordance with these guidelines, the working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as net working capital (NWC) and bank providing finance at a minimum of 20% of the turnover. (increased to 30% in 2017)
- The banks may, at their discretion, carry out the assessment based on projected turnover basis or the traditional method. If the credit requirement based on traditional production / processing cycle is higher than the one assessed on projected turnover basis, the same may be sanctioned, as borrower must be financed upto the extent of minimum 20 per cent of their projected annual turnover.
- The banks may satisfy themselves about the reasonableness of the projected annual turnover of the applicants, both for new as well as existing units, on the basis of annual statements of accounts or other documents such as returns filed with sales-tax / revenue authorities and also ensure that the estimated growth during the year is realistic.
- The borrowers would be required to bring in 5 per cent of their annual turnover as margin money. In other words, 25 per cent of the output value should be computed as working capital requirement, of which at least four-fifth should be provided by the banking sector, the balance one-fifth representing the borrower’s contribution towards margin for the working capital. In cases, where output exceeds the projections or where the initial assessment of working capital is found inadequate, suitable enhancement in the working capital limits should be considered by the competent authority as and when deemed necessary. For example, in case, annual turnover of a borrower is projected at Rs. 60.00 lakh, the working capital requirement will be computed at Rs. 15.00 lakh (i.e. 25%) of which Rs. 12 lakh (i.e. 20%) may be provided by the banking system, while Rs. 3.00 lakh (i.e. 5 %) should be borrower’s contribution towards margin money.
- Drawals against the limits should, however, be allowed against the usual safeguards so as to ensure that the same are used for the purpose intended. Banks will have to ensure regular and timely submission of monthly statements of stocks, receivables, etc., by the borrowers and also periodical verification of such statements vis-à-vis physical stocks by their officials.
- In regard to the above, few clarifications to some of the issues raised by banks are given in Annex-1.
Turnover method of working capital assessment:(Nayak Committee Norms of RBI)
Note:- this method is applicable only if SSI unit require upto Rs. 5 cr. and other unit upto Rs 1 crore.
this method assume 4 operating cycle per year.
hence working capital requirement is calculated as 25% projected annual turnover. and 5% of turnover is to be provided by owner, it means it is kept as margin hence bank has to provide minimum cc limit of 20% of projected annual turnover as working capital.
In other words, working capital requirement is 25% of average annual turnover. and minimum sanction limit by bank is 80% of working capital and balance 20% is to be provided by owner as margin. (but your operating cycle is more than 3 month and you can prove it than you may get assigned cc limit of more than 25% even)
in your example, projection annual turnover is 30 Lakhs
working capital requirement is 30 lakh X 25% = 7.5 Lakh.
margin 5% = 30 lakh X 5% = 1.5 lakh.
minimum CC limit = 7.5 lakh less 1.5 lakh that is 6 Lakhs…..but cc limit of 6 lakh does not mean that you can withdrawn 6 lakh every month. But it depends on your drawing power, which is calculated based on your inventory, debtors and creditors. and margins. Drawing power of next month is calculated for next month on the basis of previous month data.
formula to calculate drawing power is :-
(Closing stock -creditors – margin on stocks)+ (Debtors – margin on books debts)
in your example margin percentage is not given. so we assume 10 margin on stocks and 20% books debts. So drawing power can be calculated as follows:-
(300000-200000)(90%) + (150000*80%)