1. What is Drawing Power (DP) Calculation?

Drawing Power (DP) is a financial calculation used in cash credit facilities to determine the maximum amount a borrower can withdraw from their account. It's based on the value of current assets (stock and debtors) multiplied by predetermined margin percentages.

2. How Does the Calculator Work?

The calculator uses the DP formula:

Where:

• \( Stock\ Value \) — Current value of inventory/stock ($)
• \( Debtors\ Value \) — Current value of accounts receivable ($)
• \( Margin \) — Percentage expressed as decimal (e.g., 0.75 for 75%)

Example Calculation: If stock value = $50,000, debtors value = $30,000, and margin = 0.75, then DP = ($50,000 × 0.75) + ($30,000 × 0.75) = $37,500 + $22,500 = $60,000

3. Importance of DP Calculation

Details: Accurate DP calculation is crucial for banks and financial institutions to manage credit risk, ensure proper lending limits, and maintain healthy cash flow management for businesses using cash credit facilities.

4. Using the Calculator

Tips: Enter stock value and debtors value in dollars, margin as a decimal between 0-1 (e.g., 0.75 for 75%). All values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is cash credit (CC) facility?
A: Cash credit is a short-term financing option where businesses can borrow money up to a specified limit against their current assets.

Q2: How often should DP be calculated?
A: DP should be calculated regularly, typically monthly or quarterly, to reflect current asset values and ensure accurate borrowing limits.

Q3: Can margin percentages vary for different assets?
A: Yes, banks may apply different margin percentages for different types of stock and debtors based on their liquidity and risk assessment.

Q4: What happens if actual drawings exceed DP?
A: Exceeding the drawing power may result in penalties, higher interest rates, or require additional collateral from the borrower.

Q5: Are there other factors that affect drawing power?
A: Yes, banks may also consider the borrower's credit history, business performance, and overall financial health when determining final drawing limits.