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DP Formula:
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The DP (Drawing Power) calculation formula for Cash Credit (CC) determines the maximum amount that can be drawn against current assets. It is calculated as the sum of stock and receivables multiplied by a margin percentage (typically 75%).
The calculator uses the DP formula:
Where:
Explanation: The formula calculates the drawing power by taking 75% of the combined value of stock and receivables, which represents the lendable value of these current assets.
Details: Accurate DP calculation is crucial for banks and financial institutions to determine the credit limit for cash credit facilities while maintaining appropriate security margins against current assets.
Tips: Enter the total value of stock and receivables in dollars. Both values must be non-negative numbers. The calculator will compute the drawing power at 75% of the combined value.
Q1: Why is 75% used as the margin percentage?
A: 75% is a standard conservative margin that provides a safety buffer for lenders against fluctuations in asset values while allowing reasonable borrowing capacity.
Q2: What types of assets are included in stock?
A: Stock typically includes raw materials, work-in-progress, and finished goods that are readily saleable in the ordinary course of business.
Q3: How are receivables valued for DP calculation?
A: Receivables are typically valued at their face value, but older or doubtful receivables may be discounted or excluded from the calculation.
Q4: Can the margin percentage vary?
A: Yes, financial institutions may adjust the margin percentage based on the quality of assets, borrower's creditworthiness, and industry norms.
Q5: How frequently should DP be recalculated?
A: DP should be recalculated regularly (typically monthly) based on updated stock and receivables statements to reflect current asset values accurately.