Working Capital Final

Brief introduction of working capital
Every business needs funds for two purposes- for its establishment and to carry out its day to
day operations. Long term funds are required to create production facilities through purchase
of fixed assets such as plant and machinery, land, building, furniture etc. Investments in these
assets represent that part of firm‟s capital which is blocked on a permanent or fixed basis and
is called fixed capital. Working capital is the life blood and nerve centre of a business. Just as
circulation of blood is essential in the human body for maintaining life, working capital is
very essential to maintain the smooth running of a business. No business can run successfully
without an adequate amount of working capital. .
Working capital refers to that part of firm‟s capital which is required for financing short term
or current assets such as cash, marketable securities, debtors, and inventories. In other words
working capital is the amount of funds necessary to cover the cost of operating the enterprise.
Thus, Working capital means the funds (i.e.; capital) available and used for day to day
operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a
business which are used in or related to its current operations. It refers to funds which are
used during an accounting period to generate a current income of a type which is consistent
with major purpose of a firm existence.

Working capital
Working capital occupies a peculiar position in the capital structure of a company.
The decision as to the adequacy of working capital is a complicated and yet a very important
decision.
 Working capital is the life-blood of all types of enterprises, manufacturing and trading
both. It is constantly required to buy raw materials for payment of wages and other day-
to-day expenses. Without adequate working capital, manufacturing operations will be
crippled. For trading enterprises, the capacity to stock a variety of goods for sale depends
upon its working capital. It is a base on which all the activities of business enterprise
depend.
 If the business has enough working capital, it can maintain its operating efficiency. It can
buy materials and other goods on reasonable terms, can take benefits of quantity discount
and cash discount. It can keep the interest burden to the minimum.
 Adequate working capital provides psychological satisfaction and relief to the
management.
 Only those enterprises which have adequate working capital can survive in times of
depression. The investment in raw materials becomes long-term investments during
depression and cash flow declines due to fall in sale. In such circumstances only
enterprises with adequate working capital can survive.
 It has been observed that number of business units have failed due to lack of working
capital.
The inadequate working capital has the following adverse consequences:
 It stagnates growth. It becomes difficult for the firm to undertake profitable projects for
non-availability of working capital funds.
 It becomes difficult to implement operating plans and achieve the firm‟s profit target.
 Operating inefficiencies creep in when it becomes difficult even to meet day-to-day
commitments.
 Fixed assets are not efficiently utilized for the lack of working capital funds. Thus the
firm‟s profitability would deteriorate.
 Shortage of working capital funds renders the firm unable to avail attractive credit
opportunities etc.
 The firm loses its reputation when it is not in a position to honor its short term
obligations. As a result, the firm faces tight credit terms.
The excessive working capital is equally unprofitable. The extra working capital is
not utilized in business operations and earns no profit for the firm. It results in unnecessary
accumulation of inventories, leading to inventory mishandling, waste, theft etc.
The abundance of working capital would lead to waste and inefficiency

Definitions:
Working capital like many other accounting terms and financial terms has been used by
different people in different senses. One school of thought believes that, as all capital
resources available to a business organisation – From shareholders, bondholders, and
creditors (secured and unsecured) – works up in the business activities to generate revenues
and facilitate future expansion and growth; they are to be considered as „working capital‟.
Another school of thought links working capital with current assets and current liabilities.
According to them, the excess of current assets over current liabilities is to be rightly
considered as the working capital of a business organisation.
The definition of working capital given by Shubin is more illustrative. He defines working
capital as “the amount of funds necessary to cover the cost of operating the enterprise.
Working capital in a going concern is a revolving (circulating fund), it consists of cash
receipts from sales which are used to cover the cost of current operations.
“Circulating capital means current assets of the company that are changed in the ordinary
course of business from one form to another, as for example from cash to inventories,
inventories to receivables and receivables to cash.”
“Working capital is descriptive of that capital which is not fixed. But, the more common use
of working capital is to consider it as the difference between the current assets and the current
liabilities”.
Current assets and current liabilities are assets and liabilities which arise in the course of
business.

CHARACTERISTICS OF WORKING CAPITAL
The features of working capital distinguishing it from the fixed capital are as follows:
(1) Short term Needs:
Working capital is used to acquire current assets which get converted into cash in a short
period. In this respect it differs from fixed capital which represents funds locked in long term
assets. The duration of the working capital depends on the length of production process, the
time that elapses in the sale and the waiting period of the cash receipt.
(2) Circular Movement:
Working capital is constantly converted into cash which again turns into working capital.
This process of conversion goes on continuously. The cash is used to purchase current assets
and when the goods are produced and sold out; those current assets are transformed into cash.
Thus it moves in a circular away. That is why working capital is also described as circulating
capital.
(3) An Element of Permanency:
Though working capital is a short term capital, it is required always and forever. As stated
before, working capital is necessary to continue the productive activity of the enterprise.
Hence so long as production continues, the enterprise will constantly remain in need of
working capital. The working capital that is required permanently is called permanent or
regular working capital.
(4) An Element of Fluctuation:
Though the requirement of working capital is felt permanently, its requirement fluctuates
more widely than that of fixed capital. The requirement of working capital varies directly
with the level of production. It varies with the variation of the purchase and sale policy; price
level and the level of demand also. The portion of working capital that changes with
production, sale, price etc. is called variable working capital.
(5) Liquidity:
Working capital is more liquid than fixed capital. If need arises, working capital can be
converted into cash within a short period and without much loss. A company in need of cash
can get it through the conversion of its working capital by insisting on quick recovery of its
bills receivable and by expediting sales of its product. It is due to this trait of working capital
that the companies with a larger amount of working capital feel more secure.‟
(6) Less Risky:
Funds invested in fixed assets get locked up for a long period of time and cannot be
recovered easily. There is also a danger of fixed assets like machinery getting obsolete due to
technological innovations. Hence investment in fixed capital is comparatively more risky. As
against this, investment in current assets is less risky as it is a short term investment. Working
capital involves more of physical risk only, and that too is limited. Working capital involves
financial or economic risk to a much less extent because the variations of product prices are
less severe generally. Moreover, working capital gets converted into cash again and again;
therefore, it is free from the risk arising out of technological changes.
(7) Special Accounting System not needed:
Since fixed capital is invested in long term assets, it becomes necessary to adopt various
systems of estimating depreciation. On the other hand working capital is invested in short
term assets which last for one year only. Hence it is not necessary to adopt special accounting
system for them.

NEED FOR WORKING CAPITAL
The prime objective of the company is to obtain maximum profit thought the business. The
amount of profit largely depends upon the magnitude of sales. However the sale does not
convert into cash instantaneously. There is always a time gap between sale of goods and
receipt of cash. The time gap between the sales and their actual realization in cash is
technically termed as operating cycle. Additional capital required to have uninterrupted
business operations, and the amount will be locked up in the current assets. Regular
availability of adequate working capital is inevitable for sustained biasness operations. If the
proper fund is not provided for the purpose, the business operations will be effected.
Every business needs some amount of working capital. It is needed for following
purposes-
 For the purchase of raw materials, components and spares.
 To pay wages and salaries.
 To incur day to day expenses and overhead costs such as fuel, power, and office
expenses etc.
To provide credit facilities to customers, etc.

DETERMINANTS OF WORKING CAPITAL
The amount of working capital depends upon the following factors:
1. Nature of business
The nature and volume of business is an important factor in deciding the working
capital. Some businesses are such, due to their very nature, that their requirement of fixed
capital is more rather than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no funds are blocked in piling inventories
and also no funds are blocked in receivables. E.g. public utility services like railways,
infrastructure oriented project etc. there requirement of working capital is less. On the other
hand, there are some businesses like trading activity, where requirement of fixed capital is
less but more money is blocked in inventories and debtors. The requirement of working
capital varies from industry to industry from time to time I the same industry.

2. Length of production & cycle Production policies
In some business like machine tools industry, the time gap between the acquisition of
raw material till the end of final production of finished products itself is quite high. As such
amount may be blocked either in raw material or work in progress or finished goods or even
in debtors. Naturally there need of working capital is high.
Production policies of the organizations effects working capital requirements very
highly. Seasonal industries, which produces only in specific season requires more working
capital. Some industries which produces round the year but sale mainly done in some special
seasons are also need to keep more working capital.
3. Size and growth of business
It is an important factor in determining the proportion of working capital. The general
principle in this connection is that the bigger the size of the unit, the more will be the amount
of working capital required. In very small company the working capital requirement is quit
high due to high overhead, higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business start growing after certain
limit, the working capital requirements may be adversely affected by the increasing size.
The working capital requirements increase with growth and expansion of business.
Hence planning of the working capital requirements and its procurement must go hand in
hand with the planning of the growth and expansion of the firm. The implementation of the
production plan that aims at the growth or expansion of the unit necessitates more of fixed
capital and working capital both.
Even the expansion of the volume of sales increases the requirements of working
capital. Of course, it is difficult to establish a quantitative relationship between them. An
important point to be noted is that the requirements of working capital emerge before the
growth or expansion actually takes place.

4. Business/ Trade cycle
Cyclical changes in the economy also influence the level of working capital. During
boom period, the tendency of management is to pile up inventories of raw materials and
finished goods to avail the advantage of rising prove. This creates demand for more capital.
Similarly during depression when the prices and demand for manufactured goods constantly
reduce the industrial and trading activities show a downward trend. Hence the demand for
working capital is low.
If the company is operating in the time of boom, the working capital requirement may
be more as the company may like to buy more raw material, may increase the production and
sales to take the benefit of favourable market, due to increase in the sales, there may more
and more amount of funds blocked in stock and debtors etc. similarly in the case of
depressions also, working capital may be high as the sales terms of value and quantity may be
reducing, there may be unnecessary piling up of stack without getting sold, the receivable
may not be recovered in time etc.
Business fluctuations are of two types: seasonal fluctuations which arise out of
seasonal changes in demand for the product and cyclical fluctuations which occur due to ups
and downs of economic activities in the country as a whole.
The cyclical fluctuations are made up of periods of prosperity and depression. The
sales and prices increase during prosperity necessitating more working capital in the form of
inventories and book-debts. If new investment is made in fixed capital to meet additional
demand for the product, then also there will be an increase in working capital requirement.
Generally, business units adopt the policy to borrow funds on a large scale to increase
investment in working capital. As against this, the requirement of working capital gets
reduced during depression and therefore they adopt the policy of reducing their short term
debts.

5. Terms of purchase and sales (Credit policy)
In the present-day circumstances, almost all units have to sell goods on credit. Some
time due to competition or custom, it may be necessary for the company to extend more and
more credit to customers; as result which more and more amount is locked up in debtors or
bills receivables which increase the working capital requirement. The nature of credit policy
is an important consideration in deciding the amount of working capital requirement. The
larger the volume of credit sales, the greater will be the requirement of working capital. Also,
the longer the period the collection of payment takes, the greater will be the requirement of
working capital.
On the other hand, in the case of purchase, if the credit is offered by suppliers of
goods and services, a part of working capital requirement may be financed by them, but it is
necessary to purchase on cash basis, the working capital requirement will be higher.

6. Profitability
The profitability of the business may be vary in each and every individual case, which
is in turn its depend on numerous factors, but high profitability will positively reduce the
strain on working capital requirement of the company, because the profits to the extent that
they earned in cash may be used to meet the working capital requirement of the company.
The net profit of a firm is a good index of the resources available to it to meet its
capital requirements. But, from the viewpoint of working capital requirement, it is the profit
in the form of cash which is important, and not the net profit. The profit available in the form
of cash is called cash profit and it can be assessed by adding or deducting non-cash items
from the net profit of the firm. The larger the amount of cash profit, the greater will be the
possibility of acquiring working capital.

7. Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may
reduce the strain on working capital; it may ensure proper utilization of existing resources by
eliminating the waste and improved coordination etc. However, if there is improper co-
ordination between production and distribution policies/ department more working capital
maybe needed.
8. Current asset policies
A company having ample stock of liquid current assets will require lesser amount of
working capital, since adequate funds can easily be procured by disposal of current assets.
The quantum of working capital of a company is significantly determined by its current assets
policies. A company with conservative assets policy may operate with relatively high level of
working capital than its sales volume. A company pursuing an aggressive amount assets
policy operates with a relatively lower level of working capital.
9. Dividend Policies
A firm having liberal dividend policy requires high working capital to
pay cash dividends, whereas a firm following a conservative dividend policy
will require less amount of working capital.
10. Expansion
An expanding business will require increased working capital proportionate to the rate
of expansion.
11. Taxation Policies
Government taxation policy affects the quantum of working capital requirements.
High tax rates demand more amount of working capital.
12. Turnover of circulating capital
Turnover of circulating capital plays an important and decisive role in judging the
adequacy of working capital. The speed with which the circulating capital completes its
round, i.e., conversion of cash into book debts or bills receivables, and book debts or bills
receivables into cash again plays an important role.

13. Abnormal factors
Abnormal conditions like strikes and lockouts also require additional working
capital. Recessionary conditions necessitate a higher amount of stock of finished goods
remaining in stock. Similarly, inflationary conditions necessitate more funds for working
capital to maintain the same amount of current assets.
Importance of working capital
Organisations profitability to a large extent depends upon the quantum of working
capital available with it. Adequate working capital is a source of energy to any business
organisation. The need for working capital cannot be emphasized. Every business needs
some amount of working capital. The need for working capital arises due to time gap between
production and realization of cash from sales. The following points will highlight the
importance of Working Capital:
Adequate Working Capital:
# Enables a company to meet its obligations:
# Ensures the solvency of a company:
# Ensures the credit standing of a company:
# Facilitates obtaining credit from banks without much difficulty:
# Enables a company to make prompt payments to its creditors and thereby take
advantage of cash and quantity discounts offered by them
# Enables an organisation to tide over difficult periods successfully:
# Enhances the goodwill of a company as it can meet its operational expenses and
maturing liabilities in time: and
# Improves the prospects of prosperity and progress of a company.
# For the purchase of raw materials, components and spares;
# To pay wages and salaries;
# To incur day to day expenses and overhead costs such as fuel, power and office
expenses, etc;
# To meet the selling costs facilities to the customers;
# To provide credit facilities to the customers;
# To maintain the inventories of raw material, work-in –progress, stores and spares and
finished stock
Thus, adequate working capital is an important factor behind the prosperity of a business
organisation. It is thus rightly called “the backbone of the financial structure of a business
organisation”.

Types of working capital
Working capital has been classified and distinguished in a number of ways.
Some of the important classifications are as follows:
Quantitative basis
1. Gross working capital
Gross working capital is equal to the current assets only. Items of current
assets are like stock of raw material, work in progress, finished goods, spares and consumable
stores, sundry debtor bills receivables, cash and bank balance, prepaid expenses, accrues
income, advance payments, short term investments, etc. It is the value of non-fixed assets of
an enterprise and includes the above
Gross working capital indicates the quantum of working capital available to meet the
current liabilities.
Gross working Capital =Current Assets

2. Net working Capital
Net working capital is the excess of current assets over the current liabilities, i.e.
current assets less current liabilities. This concept of working capital is widely accepted. This
approach, however, does not reflect the exact position of working capital due to the following
factors:
i. valuation of inventories including written- offs
ii. debtors include the profit element
iii. debts outstanding for more than a year likewise debtors which are doubtful or
had not provided for are included as assets are also placed under the head
current assets
iv. non-moving and slow-moving items of the inventories are also included in
inventories
v. write-offs and the profits do not involve cash outflow

Net Working Capital =Current Assets - Current Liabilities

Difference between Gross and Net Working Capital
Gross and Net Working Capital are quantitative concepts, but they differ from each other
in various aspects. The following are the major differences between the two,
# Gross Working Capital means the total current assets and Net Working Capital means
excess of current assets over current liabilities.
# Though gross Working Capital can be measured by resorting to borrowings, net
working capital cannot be easily measures except by profitable business operations
over a considerable number of accounting periods.
# Gross Working Capital is quantitative concept bit Net Working Capital is a qualitative
concept.
# Gross Working Capital indicates the strength position of a business organisation
whereas net working capital is considered to be the index of solvency and liquidity of
the business.
# Gross Working Capital data cannot be used in isolation to indicate the changes in
working capital and to analyze the flow of funds. Net Working Capital data is
immensely useful in measuring the changes in the financial position of the company.

3. Time Basis
This classification is based on the time factor and it is more useful than the
classification made on quantitative basis.
a. Permanent Working Capital
b. Temporary or variable Working Capital

a. Permanent Working Capital:
This represents the quantum of current assets required on a continuing basis for an
entire year. It is the minimum aggregate of cash, inventory and debtors maintained to carry
on business operations smoothly at any time during an accounting period. Permanent
working capital is locked in the business as long as it continues to exist. Permanent working
capital is of two types:
*Initial Working Capital *Regular Working Capital
Initial working capital:
This is the amount of current assets required at the inception of an organisation. In the
initial stages, when the revenues are not regular, it may be difficult for the company to obtain
credit from the banks and at the same time it may be required to grant credit to the customers.
In such a case adequate working capital is required to activate the circulation of capital and
keep it moving till the collection from the debtors and other cash receipts exceed the
payment.
Regular working capital:
This the amount of working capital required for the continuous operations of the
enterprise. It refers to the excess of current assets over current liabilities. Any organisation
has to maintain a minimum stock of raw material, finished goods and cash to ensure its
smooth working and to meet its immediate obligations.
Thus permanent working capital is the quantum of funds required permanently for the
production of goods and services on a continuing basis to satisfy the demands of the
customers
Permanent working capital has some features. They are:
# Permanent working capital is different from fixed assets which are sunk in the
business operations and retain their form for a long period.
# Permanent working capital is constantly changing. They change from one current
asset to another as in the case of raw materials Raw materials after they are processed,
become finished goods finished goods when they are sold become debtors or
receivables debtors when they are realized become cash and so on.
# The value presented by permanent working capital never leaves the business
operation. That is why the financial manager‟s resort to long term borrowings like
debentures to meet their company‟s permanent working capital requirements.
# The size of permanent working capital will increase as long as the business is growing
and expanding.
#
b. Temporary or variable Working Capital
 Seasonal Working Capital
 Special Working Capital


Temporary Working Capital:
Temporary Working Capital is also called as variable Working Capital or circulating
Working Capital. It is influenced by the seasonal fluctuations of the business concerned.
Variable working capital may be:
i. Seasonal Working Capital or
ii. Special Working Capital
Seasonal Working Capital:
This is the amount of working capital required at stated intervals to meet the changing
seasonal requirements. When the season approaches, business needs more funds to meet the
seasonal pressure of demand. For example, a textile dealer would require large amount of
working capital a few months before Diwali.
Special Working Capital:
Special Working Capital is the amount of e Working Capital required to meet the
unforeseen eventualities that may arise during the course of operations. Any organisation
must have additional funds to meet the contingencies. For example, sudden increase in
demand, strikes, fire, floods, drastic rise in taxes, etc.
4. Measurement Basis
 Positive Working Capital
 Negative Working Capital
 Zero Working Capital
Positive Working Capital:
When the current assets are more than the current liabilities such a situation is known
as positive Working Capital. Example, If the current assets are Rs.500000/- and the current
liabilities Rs.200000/- then the Working Capital which is Rs.300000/- is termed a positive
Working Capital.
Negative Working Capital:
When the current assets are less than the current liabilities such a situation is known
as Negative Working Capital. Example, If the current assets are Rs.500000/- and the current
liabilities Rs.600000/- then the Working Capital which is negative of Rs.100000/- is termed
as Negative Working Capital. A negative working capital indicates the lack of liquidity and
solvency position which is danger signal forte business.
Zero Working Capital:
When the investment in current assets is exactly equal to the current liabilities such a
situation is known as Zero Working Capital. Example, If the current assets are Rs.500000/-
and the current liabilities Rs.500000/- then the situation is of zero working capital.

5. Cash Working Capital:
Cash working capital refers to the working capital which is available in cash or cash
resources. It is reflected by the items contained in the income statement in between the two
balances sheet dates. It reveals the operational inflow as well as outflows of cash. It is
essentially in liquid form and is calculated from the items appearing in the profit and loss
account. It shows the real flow of money at a particular time. It is considered to be the most
realistic approach in Working capital Management. It indicates the adequacy of the cash
flow.



















Working Capital Cycle
The working capital cycle is alternatively also known as the operating cycle concept
of working capital. This concept is used on the continuity of flow of funds through business
operation. This flow of value is caused by different operational activities during a given
period of time. The operational activities of an organisation may comprise:
a. Purchase of raw materials,
b. Conversion of raw materials into finished products,
c. Sale of finished products and
d. Realization of accounts receivable

Working Capital Cycle
Material cost is partly covered by trade credit from suppliers and successive
operational activities also involve cash flow. If the flow continues without any interruption,
operational activities of the company will also continue smoothly. Movements of cash
through the above process are called the circular flow of cash. The period required to
complete this flow is called he operating period‟ or the operating cycle.
To estimate the working capital requirement, the number of operating cycles in a year
is to be calculated. This is calculated by dividing the number of days in a year by the length
of the cycle. Total operating expenses of a year divided by the number of operating cycles in
that year is the working capital required.

TECHNIQUE FOR ASSESSMENT OF WORKING CAPITAL
REQUIREMENT
1. Estimation of Component of working capital Method:
Since working capital is the excess of current assets over current liabilities, an
assessment of the working capital requirements can be made by estimating the amounts of
different constituents of working capital e.g., inventories, accounts receivable, cash, accounts
payable, etc.
2. Percent of sales Approach:
This is a traditional and simple method of estimating working capital requirements.
According to this method, on the basis of past experience between sales and working capital
requirements, a ratio can be determined for estimating the working capital requirements in
future.
3. Operating Cycle Approach:
According to this approach, the requirements of working capital depend upon the
operating cycle of the business. This is a more dynamic method., it refers to working capital
in a realistic way. Working capital is decided on the basis of length of operating cycle. It is
calculated by dividing operating expenditure by the number of operating cycles.The operating
cycle begins with the acquisition of raw materials and ends with the collection of receivables
it may be broadly classified into the following four stages viz.
# Raw materials and stores storage stage.
# Work-in-progress stage.
# Finished goods inventory stage.
# Receivables collection stage.
The duration of the operating cycle for the purpose of estimating working capital
requirements is equivalent to the sum of the durations of each of these stages less the credit
period allowed by the suppliers of the firm.
Symbolically the duration of the working capital cycle can be put as follows:

O = R + W + F + D – C


Where,
O = Duration of operating cycle;
R = Raw materials and stores storage period;
W = Work-in-progress period;
F = Finished stock storage period;
D = Debtors collection period;
C = Creditors payment period.
Each of the components of the operating cycle can be calculated as follows:-

R = Average stock of raw materials and stores .
Average raw materials and stores consumptions per day

W = Average work-in-progress inventory
Average cost of production per day

D = Average book debts .
Average credit sales per day


C = Average trade creditors .
Average credit purchases per day

After computing the period of one operating cycle, the total number of operating
Cycles that can be computed during a year can be computed by dividing 365 days with
number of operating days in a cycle. The total expenditure in the year when year when
divided by the number of operating cycles in a year will give the average amount of the
working capital requirement.
Proforma Statement showing working capital requirement
The amount of working capital may be estimated in the under-mentioned format:
Statement showing the requirements of working capital for the period______
Rs. Rs.

1. Average amount locked up in Stock of Raw Materials
2. Average amount locked up in work-in progress:
Raw materials……………………………..
Labour………………………………………...
Overheads…………………………………….
3. Average amount locked up in Stock of Finished Goods
Raw materials……………………………….
Labour………………………………………
Overheads…………………………………..
4. Average amount locked up in Debtors
Raw materials……………………………….
Labour………………………………………..
Overheads……………………………………
*Profits……………………………………..

5. Advance payment to suppliers and for expenses………
6. Cash balance required…………………………………
Gross Working Capital……………………

7. Less: Creditors for supply of Raw Materials……………
8. Time lag in payment of salaries, wages& expenses…….
9. Advances received from customers……………………
10. Add: Provision for contingencies………………………..

Net working Capital required


x
x
x

x
x
x

x
x
x
x




(x)
x
x


x



xx



xx




xx

x
x
xx



x
x

xxx




Alternative Form
Statement showing the requirements of working capital for the period___________
Rs. Rs.
1. Materials
a) In stock
b) In Process
c) In finished Goods
d) Credit to Debtors

Less: Credit from Creditors

2. Wages
a) In Process…………
b) In finished Goods
c) Credit to Debtors…………………..

3. Overheads
a) In Process
b) In finished Goods
c) Credit to Debtor
4. Profit
Credit to debtors
5. Bank Balance as per balance sheet
Total Working Capital

x
x
x
x
xx
(x)
xx

x
x
x


x
x
x








xxx




xxx




xx

xxx
xxx
xxx


Or
Statement of working capital requirement for the year ending__________
Weeks Rs. Rs.
Current Assets (A)

Less: Current Liabilities (B)

Working Capital (A-B)

Calculation of figures required for working capital projection
# Raw materials in store
This amount is the cost of raw materials for the period for which they will remain in
stores.

= Cost of raw materials per year x No. of months/ days/ weeks raw
12 or 365 or 52 materials will remain in store


# Amount locked up in work-in-progress
This is the cost of raw materials, labour and overheads for the processing period.

= Cost of raw materials + labour + Overheads x Processing period
12 or 365 or 52

Note: If material is fed in the beginning of the process, 100% of the raw material cost for
the period should be considered, and if other expenses (wages and overheads) are evenly
spread throughout the year, average i.e. half of these expenses should be considered.

# Amount locked up in stock of finished goods
This is the cost of raw materials, labour and overheads for the period for which
finished stock will remain in warehouse.

= Cost of Raw materials
+ Labour + Overheads x period for which finished goods
12 or 365 or 52 will remain in warehouse

# Amount locked up in Debtors:
This is the cost of raw materials. Labour and overheads for the credit period allowed
to debtors.
Cost of raw materials +
= raw materials + labour + overheads x credit period
12 or 365 or 52 allowed to debtors

# Advance payments
This is the amount of expenses paid for the period which has not expired

# Minimum cash or bank balances required
This is usually given in the problem and is usually taken accordingly.

# Time-lag for payments to creditors for goods
This is the cost of raw materials for the period of credit allowed by
suppliers and this amount has to be deducted from gross working capital
obtained.

= Cost of raw material per year x Credit period allowed by suppliers
12 or 365 or 52

# Time lag in payment of expenses
This is the amount of expenses paid later for a particular period.

= Cost of raw material per year x Time lag in payment to
12 or 365 or 52 creditors for expenses

# Advances received from:
Advances received from customers should be done as directed in the problem.

# Provisions for contingencies
Provisions for contingencies should be made as directed in the problem.