Stock statement Drawing power

Stock Statement and Drawing power Explained

The stock statement is prepared to arrive at the actual Drawing power (amount which can be borrowed by the company from the bank) based on the actual quarter/month-end level of inventory & receivables.

Banks require a stock statement on a monthly/quarterly basis depending upon the terms and conditions mentioned in the agreement. A company may require submitting the stock statement on an ad-hoc basis as required by the bank, in case of any overdrawing. In the case of Non-utilization of working capital funds in the previous quarter, the stock and book debt statement would be waived for the previous quarter.

A stock statement consists of current assets and current liabilities. For the stock statement, inventory and receivables are taken as current assets, and creditors are taken as current liabilities. Let’s understand each one in details:

Inventory For Stock Statement:

All types of stock will be included in the inventory like raw material (Indigenous & imported), stock in the process, finished goods, and stores & spares. However, obsolete/ non-moving stock and stocks aged more than six months old will be excluded. Break up of inventory will be given in the below format:

Inventory Break-up: Figures are for illustrative purpose only

Receivables For Stock Statement:

For the stock statement, book debt will include all types of receivables related to the goods sold (Domestic & Export).

Some bank allows GST recoverable to be included in the book debt. Debtor aging will be provided in a separate Annexure. Apart from the separate Annexure, below summary is also needs to be given:

Receivables: Figures are for illustrative purpose only

Most of the banks don’t allow debtors which are overdue for more than 90 days to be included in the calculation of receivables. The intent behind this is that the banks rely on clean debts only i.e debtors are one of the primary sources from where the loan will be paid and if they consider the debt which may become bad then they will be putting themselves at risk.

It is considered that the borrower can pay off its liabilities only from its regular course of business that means the sale made to debtors or any exceptional income and if neither happens then the banks are left with only option to sell the collateral of the borrower. No bank would like to go into unnecessary litigation; instead, they would prefer to take debts that are due in the normal course of business.

In the current scenario where there are frequent defaults by the borrowers, RBI has also become very strict and random checking is also in place to check that bank has considered all the prescribed aspects while sanctioning the borrowing.

Creditors For Stock Statement:

Creditors for inventory and expenses are included in the preparation of the stock statement. Capex Creditors are not considered here reason being those creditors are not in current liability in nature.  Some banks want creditors to be bifurcated into small and medium enterprises and others. Creditor aging will be provided in a separate Annexure. Apart from the separate Annexure, below summary is also needs to be given:

Creditors: Figures are for illustrative purpose only

Other Information For Stock Statement:

Apart from the above information, information such as the sales projection for the year, Current month sales, details of facilities limit in the multiple banking (Borrowing limit with other banks, utilization out of such limits), Details of Insurance coverage, etc is to be provided. Certain declarations are also required to be given.

Note: Though the cash and bank are part of the current assets for the balance sheet purpose the same is not considered for preparing a stock statement.

Click below on the download button for the sample format of the Stock statement.

Drawing power (Maximum permissible bank finance)

On the basis of the above information, the Drawing power (Drawing power is the limit up to which a firm or company can withdraw from the working capital limit sanctioned) is calculated after deducting margin from “Inventory less Creditors + Receivables” for the month i.e bank deducts a margin of a certain % from the net working capital; the remaining amount qualifies for the purpose of the future borrowings. Drawing power is calculated by any of the following 3 methods.

The stock statement is the base to arrive at the actual Drawing power.

(1) DP method (Drawing power Method): Drawing power is the limit up to which a firm or company can withdraw from the working capital limit sanctioned. Drawing power is calculated after deducting margin from “Inventory less Creditors + Receivables” for the month/quarter as the case may be. The margin varies from 10% to 25%, depending upon the terms and conditions mentioned in the agreement.

(2) Tandon’s-I Method (Tandon’s – on Net Working Capital (Current assets-Current liabilities): According to this method the borrower has to arrange 25% of the Working Capital Gap (WCG) as margin. This method is in line with the Drawing power method.

(3) Tandon’s-II Method (Tandon’s – on Current Assets): According to this method, the borrower has to arrange 25% of Total Current Assets (TCA) as margin.

FAQ’s:

What is a stock statement?

The stock statement is prepared to arrive at the actual Drawing power (Amount which can be borrowed by the company from the bank). A stock statement consists of Current assets and current liabilities. For the stock statement, Inventory and receivables are taken as current assets, and creditors are taken as current liabilities.

Who is required to prepare the stock statement?

Banks require a stock statement on a monthly/quarterly basis depending upon the terms and conditions mentioned in the agreement. A company may require submitting the stock statement on an ad-hoc basis as required by the bank, in case of any overdrawing. In the case of Non-utilization of working capital funds in the previous quarter, the stock and book debt statement would be waived for the previous quarter.

What is Drawing power?

Drawing power is the limit up to which a firm or company can withdraw from the working capital limit sanctioned. Drawing power is calculated after deducting margin from “Inventory less Creditors + Receivables” for the month/quarter as the case may be.

What is Maximum permissible bank finance (MPBF)?

Maximum permissible bank finance (MPBF) is also known as Drawing power, It is the limit up to which a firm or company can withdraw from the working capital limit sanctioned.

What is the format of preparation of the stock statement?

There is no fixed format for the preparation of the stock statement, however, the above sample statement can be used to prepare the stock statement.

What are the methods of calculation of MPBF (Maximum permissible bank finance) or Drawing power?

There are 3 methods to calculate DP/MPBF. 1. Drawing power method 2. Tandon’s – on Net Working Capital 3. Tandon’s – on Current Assets


For the latest business and financial updates, Follow and connect with us on FacebookTwitter, and Linkedin!

To Get Finance News & Job Alerts Directly On Your Mobile Join Our WhatsApp Group


Newsletter Updates

Enter your email address below to subscribe to our newsletter

Leave a Reply