Page 149 - DMGT409Basic Financial Management

Basic Financial Management

Notes Generally determination of minimum cash balance would be based on the motives
for holding cash of business firm, attitude of management towards risk, accessibility

of the firm to the sources of finance, when needed and past experience etc. Generally

in examinations the minimum cash balance will be provided.
2. Estimation of Current Liabilities:
(a) Trade Debtors: BP (in units) × RMC per unit production × CPAS (months/days) ÷ 12
months/365 days.
(b) Direct Wages: BP (in units) × DWC per unit × LPW (months/days) ÷ 12 months/365
days.
(c) Overheads: BP (in units) × OHC per unit of production × LPOH (months/days) ÷ 12
months/365 days.

Example: From the following information of VSGR Company Ltd., estimate the working

capital needed to finance a level of activity of 1,10,000 units of production after adding a 10 per
cent safety contingency.
Amount (per unit)
Raw materials 78
Direct labour 29
Overheads (excluding depreciation) 58
Total cost 165

Profi t 24
Selling price 189

Additional information:

Average raw materials in stock: One month
Average materials-in-process (50 per cent completion stage): Half a month
Average finished goods in stock: One month

Credit allowed by suppliers: One month
Credit allowed to customers: two months
Time lag in payment of wages: One and half weeks
Overhead expenses: one month
One fourth of the sales is on cash basis. Cash balance is expected to be ` 2,15,000. You may assume
that production is carried on evenly throughout the year and wages and overhead expenses
accrue similarly.

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