1. What is Drawing Power Calculation?

Drawing Power Calculation is a financial assessment method used to determine the maximum amount that can be withdrawn from a cash credit facility. It considers the value of stock, receivables, and applicable margins to calculate the available borrowing capacity.

2. How Does the Calculator Work?

The calculator uses the Drawing Power formula:

Where:

• \( Stock \) — Current value of inventory stock in dollars
• \( Receivables \) — Amount of accounts receivable in dollars
• \( Margins \) — Required margin amount in dollars

Explanation: The calculation determines the actual borrowing capacity by adding the value of current assets (stock and receivables) and subtracting the margin requirements set by the lending institution.

3. Importance of Drawing Power Calculation

Details: Accurate drawing power calculation is crucial for effective cash flow management, ensuring businesses don't overdraw their credit facilities while maximizing their available working capital. It helps in maintaining proper financial discipline and avoiding potential penalties for exceeding credit limits.

4. Using the Calculator

Tips: Enter the current value of stock in dollars, the total accounts receivable amount in dollars, and the margin requirement in dollars. All values must be non-negative numbers. The calculator will compute the available drawing power instantly.

5. Frequently Asked Questions (FAQ)

Q1: What is drawing power in banking terms?
A: Drawing power refers to the maximum amount that a borrower can withdraw from their cash credit account based on the value of current assets after accounting for margin requirements.

Q2: How often should drawing power be calculated?
A: Drawing power should be calculated regularly, typically monthly, to reflect current inventory and receivables values and ensure accurate credit utilization.

Q3: What factors affect drawing power calculations?
A: Factors include inventory valuation methods, receivables aging, margin requirements set by the bank, and the quality/type of collateral offered.

Q4: Can drawing power be negative?
A: Yes, if margins exceed the combined value of stock and receivables, drawing power can become negative, indicating no available credit for withdrawal.

Q5: How does drawing power differ from sanctioned limit?
A: Sanctioned limit is the maximum credit approved by the bank, while drawing power is the actual amount available for withdrawal based on current asset values and margin requirements.