Page 41 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Particulars Amount for the year
Average amount backed up for stocks:
Stocks of finished product 5,000
Stocks of stores and materials 8,000
Working Capital Management Average credit given:

Inland sales, 6 weeks' credit 3,12,000
Export sales, 1.5 weeks' credit 78,000
Notes Average time lag in payment of wages and other outgoings:
Wages 1.5 weeks
Stocks and materials, 1.5 months 2,60,000
Rent and royalties, 6 months 48,000
Clerical staff, 0.5 month 10,000
Manager, 0.5 month 62,000
Miscellaneous expenses, 4,800
1.5 months 48,000
Payment in advance:
Sundry expenses (paid quarterly in advance)
Undrawn profits on an average 8,000
through out the year 11,000
2. Pro forma cost sheet of a company provides the following particulars:
Particulars Amount per unit (`)
Elements of cost:
Raw materials 80
Direct labour 30
Overhead 60
Total cost 170
Profit 30
Selling price 200

The following further particulars are available:
Raw materials in stock, on average, one month; Materials in process (completion stage, 50
per cent), on average, half a month; Finished goods in stock, on average, one month.

Credit allowed by suppliers is one month; Credit allowed to debtors is two months;
Average time-lag in payment of wages is 1.5 weeks and one month in overhead expenses;
one-fourth of the output is sold against cash; cash in hand and at bank is desired to be
maintained at ` 3,65,000.
You are required to prepare a statement showing the working capital needed to finance a
levels of activity of 1,04,000 units of production. You may assume that production is
carried on evenly throughout the year, and wages and overheads accrue similarly. For
calculation purposes, 4 weeks may be taken as equivalent to a month.
3. How that it is possible for a company to go bankrupt if it has a lot of cash but is not
profitable?
4. How would you analyze a firm’s liquidity, profitability, long-term solvency, cash flow
adequacy and market strength? List the ratio name and the related computing formula.

5. Do you think that liquidity more important than profitability in the short-term of a new
business? Why/why not?
6. As a financial manager, what factors would you consider while estimating working capital
requirements of a firm?

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