What is Drawing Power and Why Every SME Should Track It
India’s small and medium enterprises (SMEs) contribute over 30% of the GDP and employ nearly 110 million people. Yet, most SMEs face a recurring challenge of limited access to working capital.
As cash flow cycles tighten, maintaining liquidity without over-exploiting becomes crucial. One key metric that can help address this is drawing power (DP).
In this article, you’ll learn what is drawing power, why every SME should track it, how to calculate it, and how to avoid common mistakes while managing it effectively.
What is Drawing Power?
Drawing Power (DP) refers to the maximum amount of funds that a bank or lender allows an SME to borrow against its current assets, such as stock and book debts. It is calculated after accounting for creditors and margin requirements.
It helps lenders assess the liquidity available in a business and ensures that borrowed capital is backed by tangible or realizable assets.
For SMEs, it becomes a financial control tool indicating how much working capital they can safely access without straining operations.
Why Every SME Should Track Drawing Power?
Tracking drawing power isn’t just a compliance exercise; it’s a financial health check that directly impacts growth, stability, and borrowing efficiency.
Here’s why every SME must stay on top of it:
- Improves Cash Flow Planning: Monitoring DP helps predict how much capital can be accessed at any given time. This visibility supports smoother inventory purchases and timely supplier payments.
- Prevents Over-Borrowing: Regular tracking prevents SMEs from drawing funds beyond eligible limits, reducing the risk of financial strain or penalties from lenders.
- Strengthens Borrowing Capacity: A well-maintained DP record backed by accurate financial statements builds lender confidence, improving creditworthiness and loan negotiation power.
- Identifies Working Capital Gaps Early: Fluctuations in stock or receivables can signal potential liquidity issues. Tracking DP regularly allows SMEs to act proactively. Thereby, adjusting credit cycles or negotiating better payment terms.
- Supports Business Valuation and Growth Plans: When you understand your DP position, you can plan expansions or diversification confidently without compromising financial stability.
How to Calculate and Track Drawing Power Effectively?
Understanding how to calculate and monitor your drawing power is essential for maintaining financial discipline and avoiding funding shortfalls.
Regular tracking helps SMEs ensure that their borrowing capacity truly reflects real-time business performance.
Here is how you can calculate drawing power with the help of an example:
| Drawing Power Formula:DP = (Stock + Book Debts – Creditors) – Margin |
Here’s how each component contributes to the formula:
- Stock: The value of raw materials, work-in-progress, and finished goods available for sale.
- Book Debts: Amounts receivable from customers for goods sold or services rendered.
- Creditors: Outstanding dues to suppliers or vendors.
- Margin: The percentage retained by the bank to cover risks of default or asset devaluation.
Example:
If a manufacturing SME holds ₹80 lakh in stock, ₹40 lakh in book debts, and owes ₹20 lakh to creditors, with a 25% margin, the calculation will be:
DP = (80 + 40 – 20) – 25% of (80 + 40 – 20)
DP = ₹100 lakh – ₹25 lakh
DP = ₹75 lakh
This means the SME can borrow up to ₹75 lakh based on its eligible assets.
Common Mistakes SMEs Make in Managing Drawing Power
Despite its importance, many SMEs mishandle DP management due to a lack of awareness or poor systems.
Here are a few frequent mistakes and how to avoid them:
- Inflated Stock Reporting: Overstating inventory to increase DP may offer short-term relief, but it leads to credibility loss during audits. Always verify with physical stock counts.
- Ignoring Aged Debtors: Including invoices older than 90 days makes DP unrealistic. Track receivables weekly to exclude non-performing debts.
- Missing Monthly DP Statements: Banks often require monthly DP reports. Late or inaccurate submissions can delay fund disbursement. Automate this task through accounting tools.
- Neglecting Margin Adjustments: Ignoring updated bank margins can reduce available capital without warning. SMEs should confirm applicable rates regularly.
- Poor Communication with Lenders: Delays or discrepancies in financial reporting cause trust issues. Maintain transparency with lenders to ensure smooth fund access.
Final Words
Understanding and tracking drawing power is not just about compliance; it’s about financial empowerment.
When you use accurate drawing power formulas, maintain up-to-date data, and track your DP regularly, you can optimize working capital, prevent liquidity gaps, and strengthen relationships with lenders.
Platforms like Recur Club are helping modern SMEs open this potential by offering non-dilutive capital solutions based on predictable revenue flows.
With the right visibility and financial discipline, drawing power becomes the foundation for sustainable, scalable growth.
also read: Debt Collection Software Trends 2025: Beyond Automation
