Page 163 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes (a) Forecast the case inflows, by months, for July through December for ABC Toys.
(b) Forecast the accounts receivable at the end of each month for July through December,
(Assume that bad debts are written off in the third month following the sale rather
than through an allowance for doubtful accounts at the time the sale is made.)
10. It is January and the XYZ Company wishes to prepare monthly cash forecast over the next
four months. Sales for December were ` 11, 00,000. Expected sales for the next four months
are:

Month January February March April
Expected sales `6,00,000 `8,00,000 `11,00,000 `8,00,000

(a) Thirty percent of the firm’s sales are for cash; the remainder is collected in the month
following the sale (there are no bad debts). Disbursements consist of payments for
raw materials, direct labour, other operating expenses, purchases of fixed assets,
and taxes. Costs of sales are 75 percent of sales. Of these costs of sales, 38 percent are
raw material costs and 62 percent are direct labour costs. Direct labour costs are paid
in the month incurred, while raw materials are purchased on net 30-day terms.
Other operating expenses total ` 1, 50,000 per month. Expenditures for fixed assets of
` 75, 000 are to be made in February and April and tax payments of ` 1, 10,000 are to
be made in January and March. As of January 1, there are no surpluses or deficits and
the firm’s cash balance is ` 83, 000. The firm keeps a cash balance equal to 10 percent
of the month’s cost of sales. Generate monthly cash forecast for the upcoming four
months.

Answers: Self Assessment

1. Government Bonds 2. Long-range forecasts
3. Daily cash 4. Spot Method
5. Proportion of another Account 6. Compounded Growth
7. Forecasters 8. shorter
9. Sales uncertainty 10. True

11. False 12. False

9.11 Further Readings

Books D.R. Mehta, Working Capital Management, Prentice-Hall Inc., 1974.
K.V. Smith, Management of Working Capital, McGraw-Hill, New York.
Khan and Jain, Financial Management, Tata McGraw-Hill.

Pandey, Financial Management, Vikas Annex. 54.J.3 -MBA - Finance - SDE Page
20 of 23.
Prasanna Chandra, Financial Management, Theory and Practice, Tata McGraw-Hill.

V.K. Bhalla, Working Capital Management – Text and Cases, Sixth Edition, Anmol
Publications.

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