Page 221 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 10: Working Capital Management

Notes
Est. production Est. cost of raw materials Avg. raw materials holding
× ×
(in units) per unit period (month/days)
12 month/360 days

Note: 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:

Est. prodn. Est. work in process Avg. holding period of
× ×
(in units) cost per unit WIP (month/days)
12 month/360 days
3. Finished goods: The funds to be invested in finished goods inventory can be estimated
with the help of the following formula:

Est. prodn. cost of prodn. (per Avg. holding period of Finished
× ×
(in units) unit excl. dept.) goods (month/days)
12 month/360 days

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

Est. credit sales cost of sales (per Avg. debtor collection Period
× ×
(in units) unit excl. dept.) (month/days)
12 month/360 days

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:

ì ï Est. yearly prod. × Raw material req. per unit ü
í ý × Credit period granted by supplier
ï î 12 months/36 days ï þ
(months/days)

2. Direct wages:
ì ï Est. production (in units) × Direct labour per unit ü
í ý × Avg. time lag in payment of wages
ï î 12 months/360 days ï þ
(months/days)

3. Overheads (other than depreciation and amortization)
2 U × P
C = × Avg. time lag in payment of overhead (months/days)
S

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