Page 151 - DMGT409Basic Financial Management

Basic Financial Management

Notes Illustration 1: X & Y company is desirous to purchase a business and has consulted you. You are
asked to advise them regarding 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% to your computed fi gure to
allow for contingencies.
Amount for the year
(`)
(i) Average amount backed up for stocks

Stocks of fi nished goods 5,000
Stocks of stores, materials etc. 8,000
(ii) Average credit given:
Island sales 6 weeks’ credit 3,12,000

Export sales 1½ week’s credit 78,000
(iii) Average time lag in payment of wages and other
Outgoings:
Wages 1½ Weeks 2,60,000
Stock, materials etc. 1½ months 48,000

Rent Royalties, etc. 6 months 10,000
Clerical staff 1½ months 62,400
Manager 1½ months 4,800
Miscellaneous expenses 1½ months 48,000

(iv) Payment in advance:
Sundry expenses (paid quarterly in advance) 8,000

Undrawn profits on the overage throughout the year 11,000
Set up your calculations for the average amount of working capital required.
Solution:
Statement showing working capital for X & Y Company

Amount (`)
A. Current Assets
(i) Stock of fi nished goods 5,000
(ii) Stock of stores, materials etc. 8,000

(iii) Debtors

Credit sales 36,000

Export Sales for 1½ Weeks 2,250

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