Page 242 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 10: Working Capital Management

Notes

Notes 360 days in a year are generally assumed to facilitate calculation.
2. Work in progress inventory: the funds to be invested in work in progress can be estimated
by the following formula:

3. Finished goods: The funds to be invested in finished goods inventory can be estimated
with the help of the following formula:

4. Debtors: Funds to be invested in trade debtors may be estimated with the help of the
following formula:

5. Minimum desired cash and bank balance, to be maintained by the firm have to be added
in the current assets for calculation of working capital.

Estimation of Current Liabilities

Current liabilities generally affect computation of working capital. Hence the amount of working
capital is lowered to the extent of current liabilities (other than bank credit) arising in the
normal course of business. The important current liabilities like trade creditors, wage and
overheads can be estimated as follows:
1. Trade creditors:

  
  × Credit period granted by supplier (months/
  
days)
2. Direct wages:

  
  × Avg. time lag in payment of wages
  
(months/days)

3. Overheads (other than depreciation and amortization)

× Avg. time lag in payment of overhead (months/days)

!
Caution The amount of overheads may be separately calculated for different types of
overheads. In the case of settling overheads, the relevant claim should be sales volume
instead of production volume.

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