Comprehensive Stock, Receivables & Drawing Power Assessment
Verifying the security that a working capital facility actually rests on, in a sector where the inventory is small, portable and valuable
Executive Mandate Summary
Key Transaction & Governance Challenges
- •Gems and jewellery inventory is small, portable and valuable, easy to move between locations or entities in advance of a scheduled verification. Timing and location coverage matter more than count accuracy.
- •A physical count without a valuation basis proves very little in high-value inventory sectors. Valuation basis is a larger source of drawing power distortion than quantity.
- •Stock statements are prepared monthly by the borrower, valued on a basis chosen by the borrower, net of exclusions the borrower has applied. Errors compound across periods before any audit surfaces them.
- •Related party receivables, balances beyond the eligible ageing period, disputed amounts and offset creditor balances are frequently included in drawing power when the sanction requires exclusion. Misapplied eligibility is the single most common source of drawing power overstatement.
- •Slow-moving and obsolete inventory materially distorts drawing power, particularly in fashion-led inventory where ageing is rapid, and borrowers have no incentive to flag it.
- •A borrower under stress has both the motive and the practical ability to present a favourable position on a scheduled visit. The verification design must account for this before the team arrives.
Northrop Execution Architecture & Methodology
The question behind the mandate
Does the security behind this facility exist, is it worth what the statement says, and does the drawing power hold once you verify both?
Drawing power is a calculation, and like every calculation it is only as reliable as its inputs. Those inputs arrive from the borrower, in a stock statement prepared monthly by the borrower, valued on a basis chosen by the borrower, net of exclusions the borrower has applied. The gap between that statement and the verified position is where working capital credit loss originates, and it opens gradually rather than suddenly. In gems and jewellery, the problem is sharpened by the nature of the inventory: small, portable, valuable, difficult to value without expertise, and easy to move between locations in advance of a scheduled verification.
The analytical spine
Five workstreams produced the verified position, structured so that the reconciliation converts a count into a finding.
Physical inventory was verified at premises, with high-value items counted directly where materiality required it and coverage across locations planned in advance. The verified position was reconciled to the books of account and, separately, to the stock statements submitted to the lender, because the second reconciliation is the one that establishes whether the drawing power basis corresponds to reality. Valuation basis was reviewed against the sanction terms and accounting policy, and inventory was tested for slow-moving and obsolete items, since valuation is a larger source of drawing power distortion than quantity in high-value sectors. Receivables were verified, aged, and tested for eligibility against the sanction rules, with related party balances, over-aged amounts, disputed balances and creditor offsets identified and excluded. Drawing power was recomputed on the verified position, applying the margins specified in the sanction, with the variance explained by component.
What made the difference
Three disciplines separated this engagement from stock audits that confirm whatever was placed in front of the team.
First, designed before executed. Coverage, timing and location population were planned before the visit. In portable inventory sectors, a verification that is not designed for the risk is a count that confirms whatever the borrower chose to present.
Second, two reconciliations, not one. Reconciling to the books is standard. Reconciling separately to the statements submitted to the lender is what establishes whether the drawing power basis corresponds to reality, and it is the reconciliation the lender actually needs.
Third, variance explained by component. A single net difference tells a lender nothing about cause. Breaking the variance into quantity, valuation, obsolescence and eligibility distinguishes administrative weakness from deliberate overstatement, which is the distinction that governs the lender's response.
Consider this work if you are facing
Working capital facilities where drawing power rests on borrower-prepared stock statements. High-value, portable or difficult-to-value inventory sectors. Multi-location borrowers where prior audits covered only one or two locations. Receivable eligibility rules that may not be applied consistently to related party or aged balances. Inventory that has grown faster than turnover across recent periods. A stock audit provider whose reports do not explain variance by component. Empanelment cycles requiring consistent, format-compliant reporting across a portfolio of borrowers.
Verifiable Institutional Outcomes & Value Realized
- Physical position established with coverage and limitations stated explicitly, reconciled to both books and lender-submitted statements separately.
- Drawing power restated on the verified inventory and eligible receivable position, reconciled component by component to the borrower-submitted figure so the lender could see exactly which input produced the variance.
- Differences broken down into quantity, valuation basis, obsolescence and receivable eligibility, distinguishing administrative weakness from deliberate overstatement, the distinction that governs the lender's response.
- Where the position reconciled, that assurance was stated plainly, supporting lighter monitoring intensity. Where it did not, the cause was identified so the lender could calibrate its response.
Ashish Chaudhary
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