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    14working Capital Requirement

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    shruti_goel19
    Working capital is essential for businesses to finance short-term operations and current assets. There are two main concepts for understanding working capital: [1] the balance sheet concept looks at gross and net working capital, and [2] the operating cycle concept considers the time periods for raw materials, work in process, finished goods, and receivables. Working capital requirements can be forecasted using various methods like the operating cycle method, forecasting current assets/liabilities, cash forecasting, percentage of sales, and projected balance sheet approaches. Maintaining adequate working capital is important for business solvency, cash flows, and overall financial health.

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    14working Capital Requirement

    Uploaded by

    shruti_goel19
    65 views26 pages
    Working capital is essential for businesses to finance short-term operations and current assets. There are two main concepts for understanding working capital: [1] the balance sheet concept looks at gross and net working capital, and [2] the operating cycle concept considers the time periods for raw materials, work in process, finished goods, and receivables. Working capital requirements can be forecasted using various methods like the operating cycle method, forecasting current assets/liabilities, cash forecasting, percentage of sales, and projected balance sheet approaches. Maintaining adequate working capital is important for business solvency, cash flows, and overall financial health.

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    14Working Capital Requirement

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    Working capital is essential for businesses to finance short-term operations and current assets. There are two main concepts for understanding working capital: [1] the balance sheet concept looks at gross and net working capital, and [2] the operating cycle concept considers the time periods for raw materials, work in process, finished goods, and receivables. Working capital requirements can be forecasted using various methods like the operating cycle method, forecasting current assets/liabilities, cash forecasting, percentage of sales, and projected balance sheet approaches. Maintaining adequate working capital is important for business solvency, cash flows, and overall financial health.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    65 views26 pages

    14working Capital Requirement

    Uploaded by

    shruti_goel19
    Working capital is essential for businesses to finance short-term operations and current assets. There are two main concepts for understanding working capital: [1] the balance sheet concept looks at gross and net working capital, and [2] the operating cycle concept considers the time periods for raw materials, work in process, finished goods, and receivables. Working capital requirements can be forecasted using various methods like the operating cycle method, forecasting current assets/liabilities, cash forecasting, percentage of sales, and projected balance sheet approaches. Maintaining adequate working capital is important for business solvency, cash flows, and overall financial health.

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    Download as ppt, pdf, or txt
    of 26

    m 

    
     
       
    

    m 

     
    „ Funds Required for short term purposes for purchase of
    raw materials, Payment of wages and other day to day
    expenses.
    „Refers to that part of Firms capital which is requires for
    financing short term or current assets such as cash,
    marketable securities, debtors and inventories.
    „Also known as revolving and circulating capital or Short
    term capital.

    Two Concepts of Working Capital
    „ ualance Sheet Concept
    „ Operating Cycle and Circular Flow concept
    u   
    
    Two interpretations of working capital under ualance
    Sheet concept :

    Gross Working Capital

    Net working Capital


    §ross Working Capital  Capital invested in total
    current assets of a firm.
    Net Working Capital  Current assets Ȃ Current
    Liabilities
    Ú      Ú  

    Cash in hand and bank balances.

    u R

    Sundry debtors less provision for bad debts

    Inventories of stock as
    Raw material
    Work in progress
    Store and spares
    Finished goods

    Temporary investments in surplus Funds

    Prepaid Expenses

    Accrued income
    Ú     Ú     
    O uills payable.
    O Sundry creditors or account payable.
    O Accrued or outstanding expenses.
    O Short term loans, advances and deposits.
    O Dividend payable.
    O uank overdraft.
    O Provision for taxation
    ë
       Ú 
    

    Provide correct amount of working capital

    Mgmt more interested to know about total assets.

    Take into consideration that increase in funds leads to


    increase in working capital.
    ë
      Ú 
    

    O Indicates firms ability to meet its liabilities.


    O Indicates the margin of protection.
    O Indicates financial soundness of uusiness.
    O Suggests the need for financing part of working capital
    requirements out of permanent source of funds.
    
    
     Ú 

         
     

    
    
      
    
    
     
    O Gross working capital RMCP + WIPCP +FGCP+RCP
    O RMCPRaw material conversion period
    O WIPCPwork in process conversion period
    O FGCPFinished goods conversion period
    O RCPReceivables conversion period
     

    O Net operating Cycle period  Gross operating cycle


    period Ȃ Payable Deferral Period.

    O Payables Deferral Period Avg. Payables Net Credit


    Purchases Per Day
    M    Ú
     

    n the basis of Concept


    Gross Working Capital
    Net Working Capital

    n the basis of Time


    Permanent or Fixed working
    Temporary working Capital
    Êermanent Working Capital :

    Minimum amount of working capital which is


    required to ensure effective utilizations of fixed
    facilities and for maintaining the circulation of
    current assets.

    Regular working Capital is that capital which is


    required to carry day to day operations.

    Capital above regular working capital is reserve


    working capital. these require for special
    contingencies like Strikes, rise in price etc.
    O Temporary Working Capital :

    Required to meet seasonal demand nad special


    exigencies.

    Seasonal needs

    Special working capital: launching new product,


    Campaign for research
    ë
        Ú
     
    GSolvency of business
    GGoodwill
    GEasy loans
    GCash discounts
    GRegular supply of raw material
    GRegular payment of salaries
    GHigh morale
    ! 
    !"#
    $% 

    Nature of business.

    Size of business

    Manufacturing Process

    Seasonal Variations

    Working Capital Cycle

    Credit policy

    Rate of Stock Turnover


    Y     Ú
     

    Operating Cycle Method.

    Forecasting Of Current asset and Current Liabilities


    Method.

    Cash forecasting Method.

    Percentage of Sales method.

    Projected ualance Sheet Method.



    
      Ú 
    perating Cycle
     m  
      
       
        
    
    !      
     
        
       
         
    !actors Considered while forecasting of Working
    Capital:

    Cost of raw materials ,wages and overheads.

    Period during which raw material remain in store


    before it is issued for production purpose.

    Period of production cycle.

    Period during which finished goods is stored


    before sale.

    Period of credit allowed to debtors and period of


    credit allowed.

    Time lag in payment of wages and overheads.

    Minimum cash balanced required to be


    maintained

    !orecasting of current assets and current
    liabilities:
    º Acc to this method, an estimate is made of forthcoming
    periods current assets and current liabilities on the basis of
    factors like past experience, credit policy, stock policy and
    payment policy of previous years.
    º Such estimate is made for each current assets on basis of
    each month then monthly requirements are converted in to
    yearly requirements of current assets.
    º The estimate amount of current liabilities is deducted from
    this amount in order to estimate the requirement of
    working capital.
    º A certain percentage of contingencies may also be added to
    this amount.

    Ú     
    O Estimate is made of cash receipts and cash
    payments for the next period.
    O Estimate cash receipt are added to the amount of
    working capital which exists in beginning of the
    year and estimate cash payment are deducted from
    this amount.
    O The difference will be amount of working capital.

    Ê      
    Certain key ratios based on past years information
    are established.

    Ratio of sales to raw material

    Sales to semi finished goods stock.

    Sales to finished goods stock

    Sales to debtors

    Sales to cash balance


    After this sales for next year will be estimated
    and requirement of working capital will be
    determined on the basis of these ratios.

    Ê u   

    º An estimate is made of assets and liabilities for a future


    date and projected balance sheet is prepared for that
    future date.
    º The diff. in current assets and current liabilities shown
    in projected balance sheet will be amount of working
    capital.
       
    Working Capital is the life-blood of every business
    organization. WC is very essential for every business
    organization without it no business enterprise can
    survive in the market.
     "

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