One Of A Few Methods Of How Bankers Calculate Working Capital Requirement For A Business

Projected Sales for a year / 12 = projected sales a month (A) say, 1,000,000
Average Cost of Sales in percentage, say 70%
Average SGA in percentage (which includes your sales and general administration costs or overhead) say 10%
Average Debtors Turnover in month, say 3 months
Average Stock Turnover in month, say 1 month
Average Creditors Turnover in month, say 2 months

Thus
Debtors = 1,000,000 x 70% + 10% x 3 months = 2,400,000
Stocks = 1,000,000 x 70% x 1 month = 700,000
less
Creditors = 1,000,000 x 70% x 2 months = 1,400,000
So the requirement = 1,700,000

To get projected sales turnover for a year, normally bankers will take average credit turnover in the applicant's current accounts maintained at all banks.

Average Cost of Sales (COS), SGA, Debtors Creditors and Stocks Turnovers are from the applicant audited account reports submitted during the application. Thus, most bank are reluctant to lend money to a newly set up company mainly because this company does not have any financial track record and risk is extremely high.

Bankers also use this formula to determine type of credit facilities required by any company depending on nature of business.

The main reason of this calculation simply because banks only provide financial requirements not business needs. It is risky to lend more than the requirements.