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DP Calculation Formula:
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Drawing Power (DP) calculation determines the maximum amount that can be withdrawn from a cash credit facility based on current assets and a predetermined limit percentage. It's a key metric in banking and finance for managing credit limits.
The calculator uses the DP formula:
Where:
Explanation: The calculation multiplies the current assets value by the drawing power limit percentage (converted to decimal) to determine the maximum withdrawable amount.
Details: Accurate DP calculation is crucial for maintaining proper credit management, ensuring borrowers don't exceed their approved limits, and helping financial institutions manage risk exposure.
Tips: Enter current assets in dollars and drawing power limit as a percentage. Both values must be positive numbers (assets > 0, limit between 0-100%).
Q1: What constitutes current assets for DP calculation?
A: Current assets typically include cash, accounts receivable, inventory, and other assets expected to be converted to cash within one year.
Q2: How often should DP be recalculated?
A: DP should be recalculated regularly, typically monthly or quarterly, based on updated financial statements and asset valuations.
Q3: Can drawing power exceed the sanctioned limit?
A: No, drawing power is calculated as a percentage of current assets but cannot exceed the overall sanctioned credit limit set by the financial institution.
Q4: How does DP differ from working capital?
A: Drawing power represents the withdrawable amount based on current assets, while working capital is the difference between current assets and current liabilities.
Q5: What happens if current assets decrease significantly?
A: A significant decrease in current assets will reduce the drawing power, potentially requiring the borrower to reduce their outstanding balance or provide additional security.