Unit 3 1.pptx

Finance

1. Working Capital Estimation & Calculation

2. The efficiency of the planning and management is subject to the correct estimate of the working capital requirement. Aspect of working capital planning, management & control.

3. Irrespective of the planning exercise made and control mechanism adopted, the correct estimation of working capital requirement is the fundamental necessity of good and efficient working capital management.

4. Q. In finance, "working capital" means the same thing as: Total assets. Fixed assets. Current assets. Current assets minus current liabilities.

5. Q. Spontaneous financing  includes: accounts receivable. accounts payable. short-term loans. None of these

6. A firm must estimate in advance as to how much net working capital will be required for the smooth operations of the business. Only than it can bifurcate the requirement into permanent and temporary working capital. Estimation Process

7. Working Capital as a percentage of Net Sale. Working Capital as percentage of Total or Fixed Assets. Working Capital based on the Operating Cycle. Approaches to estimate the working capital requirements…

8. To estimate total current assets as a percentage of net sales. To estimate current liabilities as a percentage net sales. The difference between the two above, is the net working capital as a percentage of net sales. Working Capital as a percentage of Net Sales

9. ABC ltd.for past three years, on the basis of which the working capital requirement for the next year is to be estimated, given that the sales are expected to increase by 10% over sales level of current year: Particulars' Year 1 Year 2 Year 3 Net Sales 10,00,000 12,00,000 14,00,000 Total Current Assets 2,00,000 2,52,000 3,00,000 Total Current Liabilities 50,000 60,000 70,000 Current assets as a % of sales 20% 21% 22% Current Liabilities as a % of Sales 5% 5% 5%

10. Solution Expected Sales = 14,00,000 + 10% = 15,40,000/- Average Current Assets of last 3 yrs. 20%+21%+22%= 21% 3 It means 21% of 15,40,000/- = 3,23,400/- Current liabilities 5%of 15,40,000/-= 77,000/- Net working Capital= CA-CL = 2,46,400/-

11. This approach of estimation of working capital requirement is based on the fact that total assets of the firm are consisting of fixed assets and current assets. Working Capital as percentage of Total Assets or Fixed Assets

12. Q. Difference between current assets and current liabilities is : Gross working capital Net working capital Fixed capital Equity capital

13. On the basis of past experience, a relationship between : Total current assets i.e. gross working capital or net working capital… Total fixed assets or total assets of the firm …. ….. is established

14. Which of the following is not used to estimate the working capital requirement? As percentage of Net Sales As percentage of Fixed Assets As percentage of Profit None of these

15. For example… a firm is maintaining 20% of its total assets in the form of current assets and expected to have total assets Rs. 50,00,000/- next year. …Thus, the current assets of the firm would be Rs.10,00,000/-

16. As per firm’s policy there should be 20 % of its Fixed assets in the form of current assets, if firm’s fixed assets are Rs. 2,50,000 then current assets will be 15000 25000 45000 65000

17. In this approach, the working capital may be also established as % of Fixed Assets. The firm basically plans the future level of fixed assets in terms of Capital Budgeting decision.

18. Working capital requirement of a firm depends upon two variables : Time Factor Value Factor

19. Source Item Time Factor Value Factor Raw material Storage Period Value of Raw Material Work in progress Production Period (Conversion Period) Raw Material Consumed + Labor Cost + Mfg. Expenses Finish goods Finish Goods Storage Period Raw Material Consumed + Labor Cost + Mfg. Expenses + Administrative expenses Debtors Credit Period Allowed Raw Material Consumed + Labor Cost + Mfg. Expenses + Administrative expenses Creditors Deferred Period Allowed Value of Raw Material Purchased Labor Cost Lag period in Payment Labor Expenses during the lag period Overhead Expenses Lag period in Payment Overhead expenses during the lag period