How To Calculate Dp In Cc Limit

Drawing Power Formula:

\[ DP = (Stock + Receivables - Creditors) \times \text{Drawing Power Percentage} \]

Stock ($):

Receivables ($):

Creditors ($):

Drawing Power Percentage (%):

Drawing Power (DP) ($):

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1. What is Drawing Power in Cash Credit Limit?

Drawing Power (DP) is the maximum amount a borrower can withdraw from their cash credit account at any given time. It's calculated based on the value of current assets minus liabilities, multiplied by a predetermined percentage set by the lending institution.

2. How Does the Calculator Work?

The calculator uses the Drawing Power formula:

\[ DP = (Stock + Receivables - Creditors) \times \text{Drawing Power Percentage} \]

Where:

$ Stock $ — Value of inventory or stock on hand ($)
$ Receivables $ — Amounts owed to the business by customers ($)
$ Creditors $ — Amounts owed by the business to suppliers ($)
$ Drawing Power Percentage $ — Percentage set by the bank (%)

Explanation: The formula calculates the net working capital available and applies a conservative percentage to determine the safe withdrawal limit.

3. Importance of Drawing Power Calculation

Details: Accurate DP calculation is crucial for maintaining proper cash flow management, ensuring borrowing limits are not exceeded, and maintaining healthy banking relationships.

4. Using the Calculator

Tips: Enter all values in dollars, provide accurate current asset and liability figures, and use the drawing power percentage specified by your financial institution.

5. Frequently Asked Questions (FAQ)

Q1: Why is drawing power important in cash credit facilities?
A: Drawing power determines the actual available credit limit that a borrower can utilize at any point in time, based on current business assets.

Q2: How often should drawing power be calculated?
A: Drawing power should be calculated regularly, typically monthly, to reflect current business conditions and asset values.

Q3: What factors affect the drawing power percentage?
A: The percentage is determined by the bank based on industry norms, business risk profile, quality of collateral, and relationship with the borrower.

Q4: Can drawing power be higher than the sanctioned limit?
A: No, drawing power cannot exceed the overall sanctioned credit limit set by the bank.

Q5: What happens if stock values fluctuate significantly?
A: Significant fluctuations in stock values will directly affect the drawing power calculation, potentially increasing or decreasing available credit.