How is Drawing Power Calculated

Drawing Power Formula:

\[ DP = (Receivables + Inventory) \times \text{Drawing Limit %} \]

Drawing Power (DP):

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1. What is Drawing Power?

Drawing Power (DP) is the maximum amount that can be withdrawn by a borrower against current assets like receivables and inventory. It represents the loan advance available on current assets and is a key metric in working capital financing.

2. How Does the Calculator Work?

The calculator uses the Drawing Power formula:

\[ DP = (Receivables + Inventory) \times \text{Drawing Limit %} \]

Where:

\( Receivables \) — Accounts receivable amount (currency)
\( Inventory \) — Inventory value (currency)
\( Drawing Limit % \) — Percentage limit set by the lender (%)

Explanation: The formula calculates the maximum borrowing capacity by summing current assets and applying a predetermined drawing limit percentage set by the financial institution.

3. Importance of Drawing Power Calculation

Details: Drawing Power calculation is crucial for managing working capital requirements, ensuring adequate cash flow, and maintaining optimal borrowing levels without exceeding sanctioned limits.

4. Using the Calculator

Tips: Enter receivables and inventory amounts in currency units, and drawing limit as a percentage. All values must be valid (non-negative numbers, drawing limit between 0-100%).

5. Frequently Asked Questions (FAQ)

Q1: What factors affect Drawing Power?
A: Drawing Power is influenced by the quality of receivables, inventory turnover ratio, credit period, and the lender's risk assessment policies.

Q2: How often should Drawing Power be calculated?
A: It should be calculated monthly or quarterly based on the frequency of financial reporting and the terms of the lending agreement.

Q3: Can Drawing Power exceed sanctioned limits?
A: No, Drawing Power cannot exceed the overall sanctioned limit set by the financial institution for working capital facilities.

Q4: What happens if current assets decrease?
A: A decrease in receivables or inventory will reduce the Drawing Power, potentially requiring additional collateral or reducing borrowing capacity.

Q5: Is Drawing Power the same as working capital?
A: No, Drawing Power is the borrowable amount against current assets, while working capital represents the difference between current assets and current liabilities.