Page 40 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 2: Planning of Working Capital

While the liberal credit policy offered to customers would necessitate more working Notes
capital tight credit terms would reduce its requirement.

The liberal credit terms available from creditors/suppliers of materials would be an
offsetting factor.
The payment of dividend consumes cash resources and therefore, decreases WC of a firm.
Conversely, the non-payment of dividend increases WC.
Working capital requirements are to be computed with reference to cash costs and not the
sale price as depreciation is a non-cash cost and, hence, does not need WC.

The investment required to finance debtors are at cost price.

2.7 Keywords

Bond: An instrument for long-term debt.
Circulating Capital: Working capital is also known as circulating capital.
Current Assets: Current assets are the assets, which can be converted into cash within an accounting
year or operating cycle.
Debt Capital: Debt capital is the capital that a business raises by taking out a loan.
DIO: Days Inventory Outstanding
DPO: Days Payable Outstanding
DSO: Days Sales Outstanding
Equity Capital: Equity capital can be understood as the invested money that is not repaid to the
investors in the normal course of business.
Gross Working Capital: It refers to the firm’s investment in Current Assets.
Net Working Capital: This is the excess of Current Asset over Current liabilities.
Sweat Equity: There is also a form of capital known as sweat equity which can be explained as
equity acquired by a company’s executives on favorable terms, to reflect the value the executives
have added and will continue to add to the company.

2.8 Review Questions

1. X & Y Ltd. is desirous to purchase a business and has consulted you, and one point on
which you are asked to advise them, is the average amount of working capital which will
be required in the first year’s working.
You are given the following estimates and are instructed to add 10 per cent to your
computed figure to allow for contingencies.

Particulars Amount for the year
Average amount backed up for stocks:
Stocks of finished product 5,000
Stocks of stores and materials 8,000
Average credit given:
Inland sales, 6 weeks' credit 3,12,000
Export sales, 1.5 weeks' credit 78,000
Contd...

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