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    Working Capital Management

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    gopalagarwal2387
    The operating cycle of a manufacturing firm is the time required to convert raw materials into sales. It is the sum of the inventory conversion period, debtors conversion period, and creditors deferral period. There are several methods to estimate working capital requirements, including the percentage of sales method, regression analysis, cash forecasting, operating cycle method, and projected balance sheet method. Working capital is essential for businesses and can be financed through both long-term sources like equity and debt as well as short-term sources like trade credit, bank credit, and commercial papers.

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    Working Capital Management

    Uploaded by

    gopalagarwal2387
    561 views14 pages
    The operating cycle of a manufacturing firm is the time required to convert raw materials into sales. It is the sum of the inventory conversion period, debtors conversion period, and creditors deferral period. There are several methods to estimate working capital requirements, including the percentage of sales method, regression analysis, cash forecasting, operating cycle method, and projected balance sheet method. Working capital is essential for businesses and can be financed through both long-term sources like equity and debt as well as short-term sources like trade credit, bank credit, and commercial papers.

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    The operating cycle of a manufacturing firm is the time required to convert raw materials into sales. It is the sum of the inventory conversion period, debtors conversion period, and creditors deferral period. There are several methods to estimate working capital requirements, including the percentage of sales method, regression analysis, cash forecasting, operating cycle method, and projected balance sheet method. Working capital is essential for businesses and can be financed through both long-term sources like equity and debt as well as short-term sources like trade credit, bank credit, and commercial papers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    561 views14 pages

    Working Capital Management

    Uploaded by

    gopalagarwal2387
    The operating cycle of a manufacturing firm is the time required to convert raw materials into sales. It is the sum of the inventory conversion period, debtors conversion period, and creditors deferral period. There are several methods to estimate working capital requirements, including the percentage of sales method, regression analysis, cash forecasting, operating cycle method, and projected balance sheet method. Working capital is essential for businesses and can be financed through both long-term sources like equity and debt as well as short-term sources like trade credit, bank credit, and commercial papers.

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    of 14

    By :- Group B

    Gopal Kumar Agarwal


    Sangita Pattnaik
    Shipra Kumari
    Vikash Kedia
    Seema Kumari
    “Operating Cycle is a time duration required
    converted raw materials into sale”

    The Length of the operating cycle of a


    manufacturing firm is the sum of :
    • Inventory Conversion Period
    • Debtors Conversion Period
    • Creditors deferral Period
    Sales Debtors

    Finished Goods Cash

    WIP Raw Material


    Raw Material Conversion Period = Raw Material Inventory
    Raw Material Consumption Per Day

    Working Progress Conversion Period = Work In Process


    Inventory
    Cost Of Production Per Day

    Finished Goods Conversion Period = Finished Goods Inventory


    Cost Of Goods Sold
    Debtors Conversion Period = Debtors
    Credit Sale Per Day

    Gross Operating Cycle = Inventory Conversion Period


    + Debtors Conversion Period

    Operating Cycle = Gross Operating Cycle + Net Operating Cycle

    Net Operating Cycle = Inventory Conversion Period +


    Debtors Conversion Period + Creditors deferral Period
    Creditors deferral Period = Creditors
    Credit Purchase Per Day

    Net Operating Cycle = Operating Cycle


    – Creditors deferral period
    “Working Capital is a life-blood & controlling nerve
    centre of a Business”. No Business can be successfully run
    without an adequate amount of Working Capital.

    Methods of Estimating Working Capital Requirements :-


    • Percentage Sales Method
    • Regression Analysis Method
    • Cash Forecasting Method
    • Operating Cycle Method
    • Projected Balance Sheet Method
    1. Percentage of Sales Method : This method of estimating Working
    Capital is based on the assumptions that the level of
    the working capital of the firm is directly related to the
    sales value.

    2. Regression Analysis Method : This method is based upon the


    statistical technique of estimating or predicting the
    unknown value of a dependent variable of a dependent
    variable from the known value of an independent variable.
    3. Cash Forecasting Method : This method of estimating Working
    Capital requirements involves forecasting of cash receipts
    & disbursements during a future period of time.
    It is similar to the preparation of the Cash Budget.
    4. Operating Cycle Method : This method is based upon the
    operating cycle concept of working capital.
    WC= Cost Of Goods Sold * Operating Cycle(days) + Desired Cash
    Balance
    365 or 360 days
    5. Projected B/S Method : Under this method, Projected balance sheet
    for future date is prepared by forecasting of assets &
    liabilities by following any of the methods stated above.
    Long Term Sources Short Term Sources

    • Issue Of Shares Internal External


    • Issue Of Debentures
    • Retained Profits • Depreciation Funds • Trade Credit
    • Sales Of Fixed Assets • Provision for • Credit papers
    • Terms Loans Taxation • Bank Credit
    • Accrued Expenses • Public Deposits
    It refers to the credit extended by the
    suppliers of goods in the normal course of
    business.
    Commercial banks are the most important source
    of short term capital. The major portion of
    working capital loans are provided by Commercial
    Banks.
    Such as :-
    • Loans.
    • Cash Credit.
    • Overdrafts.
    • Purchasing & Discounting of Bills.
    Commercial Papers represents unsecured
    promissory notes issued by firms to raise short
    term funds.

    In India Reserve Bank of India introduced


    commercial paper in the Indian money market.

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