1. What is Drawing Power Calculation?

Drawing Power Calculation is a financial metric used in cash credit facilities to determine the maximum amount a borrower can withdraw based on their current assets and liabilities. It helps banks assess the borrowing capacity against pledged collateral.

2. How Does the Calculator Work?

The calculator uses the Drawing Power formula:

Where:

• \( Stock \) — Value of inventory or stock on hand ($)
• \( Debtors \) — Amount owed by customers ($)
• \( Creditors \) — Amount owed to suppliers ($)
• \( Margin \) — Lender's margin requirement (decimal)

Explanation: The formula calculates the net working capital available after accounting for current liabilities, then applies the lender's margin requirement to determine the safe withdrawal limit.

3. Importance of Drawing Power Calculation

Details: Accurate drawing power calculation is crucial for managing cash credit facilities, ensuring borrowers don't overdraw, and maintaining proper collateral coverage for lenders.

4. Using the Calculator

Tips: Enter all values in dollars, with margin as a decimal (e.g., 0.75 for 75%). Ensure all values are positive numbers with margin between 0-1.

5. Frequently Asked Questions (FAQ)

Q1: What is the purpose of drawing power in cash credit?
A: Drawing power determines the maximum amount a borrower can withdraw from their cash credit account based on current collateral values.

Q2: How often should drawing power be calculated?
A: Drawing power should be calculated regularly, typically monthly, to reflect current inventory, receivables, and payables positions.

Q3: What happens if drawing power decreases?
A: If drawing power decreases below the utilized amount, the borrower may need to reduce their outstanding balance or provide additional collateral.

Q4: Can drawing power be negative?
A: No, drawing power cannot be negative. If (Stock + Debtors - Creditors) is negative, drawing power is zero.

Q5: How does margin affect drawing power?
A: Higher margin requirements (closer to 1) result in lower drawing power, providing more security for the lender.