AFM IBSB Working Capital Basics Word

Working Capital Management
Day to day operations – Short Term Funds

Operating Capital, Revolving Capital, Circulating
Capital
On the basis of Concept:
- Gross Working Capital = Total of CA
- Net Working Capital = Total CA – Total CL
On the basis of Time:
- Permanent Working Capital (Regular)
- Temporary Working Capital (Variable)
o Seasonal Working Capital
o Special Working Capital
Operating Cycle and Cash Cycle
Dr. G V Kesava Rao, B.Sc., MBA, PGDFM, LL.M.-Research, FDP-IIM A, CS, LIP-IBBI, Ph. D
Professor, Advocate and Qualified Insolvency Professional Page 1
Factors affecting Working Capital:
1. Nature of the Business
2. Size of the Business
3. Production Cycle
4. Production Policy
5. Credit Policy
6. Business Cycles
7. Growth and Expansion
8. Availability of Raw Materials
9. Profit levels
10. Taxes
11. Dividend Policy
12. Depreciation Policy
13. Price Changes
14. Operating Efficiency
15. Availability of Credit
Approaches to Working Capital Financing

Permanent Working Capital – Long Period
Variable Working Capital – Short Period
College Fees – 9 Lakhs (Fixed Assets),

Permanent Working Capital – 15,000 per month,
Variable Working Capital – 5,000 per month
Hedging Approach to Working Capital Financing
Conservative Approach to Working Capital Financing
Aggressive Approach to Working Capital Financing
Sources of Working Capital
1. Indigenous Bankers
2. Trade Credit
3. Accrued Expenses
4. Advances from customers
5. Instalment Credit
6. Deferred Incomes
7. Commercial Paper
8. Certificate of Deposit
9. Bank
a. Loans
b. OD
c. Cash Credit
d. Letter of Credit
10. Factoring and Bills Discounting
Operating Cycle
= Inventory Period + Accounts Receivable Period
Average Inventory
Inventory Period = × No. of Days/Months
Cost of Goods Sold
Accounts Receivable Period
Average Accounts Receivable
= × No. of Days/Months
Net Sales
Cash Cycle = Operating Cycle − Accounts Payable Period
Accounts Payable Period
Average Accounts Payable
= × No. of Days/Months
Cost of Goods Sold
Inventory Period =
Average Inventory
× No. of Days or Months
Cost of Goods Sold
(60+64)÷2
= × 360 = 62 Days
360
Accounts Receivable Period
Average Accounts Receivable
= X No. of Days or Months
Net Sales
84
= × 360 = 60.48 Days
500
Operating Cycle
= Inventory Period
+ Accounts Receivable Period
= 62 + 60.48 = 122.48 Days
Accounts Payable Period
Average Accounts Payable
= X No. of Days or Months
Cost of Goods Sold
43
= × 360 = 43 Days
360
Cash Cycle
= Operating Cycle
− Accounts Payable Period
= 122.48 − 43 = 79.48 Days
Estimation of Working Capital Requirements:
Statement of Working Capital Requirements of XXXX
Ltd. for the period ending XX-XX-XXXX.
Amount Amount Amount
Particulars (Rs.) (Rs.) (Rs.)
A: Current Assets
1.Raw Materials (x Weeks or Months)
N
{
52/12
× (RM/Unit) × Weeks/Months} XXX
2.Work in Process (x Weeks or
Months)
N
RM: {52/12 × (RM/Unit) × Weeks/Months}
XX
DL:
N 50
{
52/12
× (DL/Unit) × Weeks/Months × (
100
)} XX
OHs:
N
{ × (OHs/Unit) × Weeks/Months ×
52/12
50
(
100
)} XX XXX
3.Finished Goods (x Weeks or Months)
N
RM: {52/12 × (RM/Unit) × Weeks/Months} XX
N
DL:{52/12 × (DL/Unit) × Weeks/Months} XX
N
OHs: {52/12 × (OHs/Unit) × Weeks/Months} XX XXX
4.Debtors (x Weeks or Months)
N
RM: {
52/12
× (RM/Unit) × Weeks/Months ×
% Credit Sales} XX
N
DL:{ 52/12
× (DL/Unit) × Weeks/Months ×
% Credit Sales} XX
N
OHs: {
52/12
× (OHs/Unit) × Weeks/Months ×
% Credit Sales} XX XXX
5. Cash XX
6. Any Other XX
Total Current Assets XXXX
B: Current Liabilities
1.Trade Creditors for Raw Materials (x
Weeks or Months)
N
{
52/12
× (RM/Unit) × Weeks/Months} XX
2.Lag in Payment of Wages:
N
{
52/12
× (DL/Unit) × Weeks/Months} XX
3.Lag in Payment of Overheads
N
{
52/12
× (OHs/Unit) × Weeks/Months} XX
4. Any Other XX
Total Current Liabilities XXX
Net Working Capital (CA-CL) XXX
(+) Contingencies, if any XX
Working Capital Required XXX
Problem:
The cost records of a company provided following particulars:
Item Price Rs./Unit
Raw Material 80
Direct Labour 30
Overheads 60
Selling Price of Finished Product 200
Following extra details are also available:
• Raw material is in stock for an average period of 1 month.
• Average processing period of Materials is ½ month.
• Finished stock is in stock for an average period of 1 month.
• Credit allowed by suppliers is 1 month.
• Credit allowed to customers is 2 months.
• Lag in payment of wages is 1½ weeks.
• Lag in payment of overhead expenses is 1 month.
• 25% of the sales are on cash basis
• Company requires cash balance of Rs. 25000 in hand every month.
You are required to prepare a statement showing the working capital requirements
for an activity level of 1, 04,000 units of production assuming that the production
and overheads accrue evenly throughout the year. A period of 4 weeks is equal to
1 month.
Statement of Working Capital Requirements of XXXX
Co. Ltd. for the period ending XX-XX-XXXX.
Particulars Amount Amount
(Rs.) (Rs.)
A: Current Assets
1.Raw Materials (4 Weeks)
104000
{ 52 × (80) × 4} 640000
2.Work in Process (2 Weeks)
RM: {104000
52
× (80) × 2} 320000
DL:{104000
52
50
× (30) × 2 × ( )}
100 60000
OHs:{104000
52
50
× (60) × 2 × ( )}
100 120000 500000
3.Finished Goods (4 Weeks)
RM: {104000
52
× (80) × 4} 640000
104000
DL:{ 52
× (30) × 4} 240000
104000
OHs:{ 52
× (60) × 4} 480000 1360000
4.Debtors (8 Weeks)
RM: {104000
52
75
× (80) × 8 × ( )}
100 960000
DL:{104000
52
75
× (30) × 8 × ( )}
100 360000
OHs:{104000
52
75
× (60) × 8 × ( )}
100 720000 2040000
5. Cash 25000
Total Current Assets 4565000
1.Trade Creditors for Raw Materials
(4Weeks)
104000
{ 52 × (80) × 4} 640000
2.Lag in Payment of Wages (1.5
Weeks)
104000
{
52
× (30) × 1.5} 90000
3.Lag in Payment of Overheads (4
Weeks)
104000
{
52
× (60) × 4 } 480000
Total Current Liabilities 1210000
Net Working Capital 3355000
(+) Contingencies Nil
Working Capital Required 3355000
Solution:
Statement of Working Capital requirements for Hindusthan Garments
Limited for period -----------.
Note: It is assumed that there are 12 months, and 52 weeks in a year.
Particulars Amount (Rs)

Current Assets:
Stock of Raw Materials 10000
Stock of Finished Goods 6000
Debtors:
Domestic - (312000/52) *6 36000
Export – (78000/52) * 1.5 2250
Advance Payments (11000/4)*1 2750
Current Liabilities:
Lag in Wages (260000/52) * 1.5 7500
Creditors (50000/12) * 1.5 6250
Lag in Rent etc. (10000/12) * 6 5000
Lag in Clerical Salary (62400/12) * 0.5 2600
Lag in Manager’s Salary (4800/12) * 0.5 200
Lag in Misc. Expenses (50000/12) * 1.5 6250
Net Working Capital (CA – CL) 29200
(+) Contingencies @ 16% (0.16* 29200) 4672
Operating Capacity – 60%
No. of Units at 60% = 36,000
Increase in Capacity = 33 1/3%
Additional Capacity = 60* 1/3 = 20%
Therefore, Proposed Capacity = 80%
No. of Units at 80% = (36000/0.6) * 0.8 = 48,000
Selling Price per Unit = 15
Raw Material = 40%
Raw Material Cost per Unit = 0.4*15 = 6
Direct Wages = 20%
Direct Wages Cost per Unit = 0.2 * 15 = 3
Overheads = 20%
Overheads Cost per Unit = 0.2 * 15 = 3
Statement of Working Capital Requirements of XYZ

Ltd. for the period ending XXXXXXXX.
Amount Amount
Particulars (Rs.) (Rs.)
A: Current Assets
1.Raw Materials (1 Month)
48000
{ 12
× (6) × 1} 24000
2.Work in Process (1 Month)
48000
RM: { × (6) × 1} 24000
12
48000 50
DL: { × (3) × 1 × ( )} 6000
12 100
48000 50
OHs: { × (3) × 1 × ( )} 6000 36000
12 100
3.Finished Goods (1 Month)
48000
RM: { × (6) × 1} 24000
12
48000
DL: { × (3) × 1} 12000
12
48000
OHs: { × (3) × 1} 12000 48000
12
4.Debtors (2 Months)
48000
RM: { × (6) × 2} 48000
12
48000
DL: { × (3) × 2} 24000
12
48000
OHs: { × (3) × 2} 24000 96000
12
5. Cash 50000
1.Trade Creditors for Raw Materials (3
Months)
48000
{ × (6) × 3} 72000
12
2.Lag in Payment of Wages (1 Month)
48000
{
12
× (3) × 1} 12000
3.Lag in Payment of Overheads (1
Month)
48000
{
12
× (3) × 1} 12000
Net Working Capital 158000
(+) Contingencies Nil

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Working Capital Management

Day to day operations – Short Term Funds

Approaches to Working Capital Financing

College Fees – 9 Lakhs (Fixed Assets),

Hedging Approach to Working Capital Financing

Aggressive Approach to Working Capital Financing

Note: It is assumed that there are 12 months, and 52 weeks in a year.

Particulars Amount (Rs)

No. of Units at 60% = 36,000

Increase in Capacity = 33 1/3%

Additional Capacity = 60* 1/3 = 20%

Therefore, Proposed Capacity = 80%

No. of Units at 80% = (36000/0.6) * 0.8 = 48,000

Selling Price per Unit = 15

Raw Material Cost per Unit = 0.4*15 = 6

Direct Wages = 20%

Direct Wages Cost per Unit = 0.2 * 15 = 3

Overheads Cost per Unit = 0.2 * 15 = 3

Statement of Working Capital Requirements of XYZ

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