Page 220 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes (g) Average collection period for debtors 45 days

(h) Average credit period availed from suppliers 30 days
(i) No. of days in a year 360 days
Solution: Calculation of net operating cycle period of XYZ Ltd.

Avg. stock of RM
Raw material storage period (a) =
Avg. cost of RM consumption/day

100,000
= = 30 days
3333.33

Avg. WIP inventory
WIP Holding period (b) =
Avg. cost of production per day
60,000 60,000
= = = 22 days
10,00,000 360 2777.77
¸
Avg. F.G. inventory
Finished goods storage period (c) =
Avg. cost of goods sold/ day

80,000 80,000
= = 18 days
16,00,000 360 4444.44
¸
Debtors Collection Period (d) 45 days
Total operating cycle (a) + (b) + (c) + (d) 115
Less. Avg. credit period availed 30

Net operating cycle period 85

360
No. of operating cycle in a year = 4.2 times
85
10.4.1 Estimate of Future Working Capital based on Current Assets and
Current Liabilities

The estimate of future working capital can be made if the amount of current assets and current
liabilities can be estimated as follows:

The various constituents of current assets and current liabilities have a direct bearing on the
computation of working capital and the operating cycle. The holding period of various constituents
of operating cycle may either contract or expand the net operating cycle period. Shorter the
operating cycle period, lower will be the requirement of working capital and vice versa.

Estimation of Current Assets
The estimates of various components of working capital may be made as follows:

1. Raw material inventory: If the funds to be invested in raw materials/inventory may be
estimated on the basis of production budget, the estimated cost per unit and the average
holding period of raw material inventory by using the following formula.

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