Page 152 - DMGT409Basic Financial Management

Unit 8: Working Capital Management

(iv) Advance payment of sundry expenses: 2,000 Notes

Total investment in Current Assets (A) 53,250
B. Current Liabilities
×
⎡ ` 2,60,000 1 1 2 weeks ⎤
(i) Wages 7,500
⎢ ⎣ 52weeks ⎥ ⎦
×
⎡ ` 48,000 1½months⎤
(ii) Stocks, materials etc. ⎢ ⎥ 6,000
⎣ 12months ⎦
⎡ ` 10,000 6 months⎤
×
(iii) Rent, Royalties, etc. ⎢ ⎥ 5,000
⎣ 12months ⎦
×
⎡ ` 62,400 ½months⎤
(iv) Clerical Staff ⎢ ⎥ 2,600
⎣ 12months ⎦
×
⎡ ` 48,000 ½months⎤
(v) Manager ⎢ ⎥ 200
⎣ 12months ⎦
×
⎡ ` 48,000 1½months⎤
(vi) Miscellaneous expenses ⎢ ⎥ 6,000
⎣ 12months ⎦
Total estimated of Current Liabilities (B) 27,300
C. Net working capital (A-B) (53,250-27,300) 25,950
Add: 10% contingency allowance (10% of 25,950) 2,595
D. Average working capital 28,545

Notes

1. For calculations, a time period of 52 weeks/12 months has been assigned in a year.

2. Undrawn profit has been ignored in the working capital computation for the
following reasons:

(a) For the purpose of determining working capital provided by net profit, it is

necessary to adjust the net profit for income – taxes and dividends.

(b) Profit need not always be a source of finance working capital. It may be used

for other purposes like purchases of fixed assets, repayment of long-term loans
etc.
3. Actual working capital requirement would be more than what is estimated here as
in the problem cash component of current assets is not given.

Illustration 2: XYZ Company sells goods on a gross profit of 25% depreciation is taken into
account as a part of cost production. The following are the annual figures given to you:

Sale (Two month’s Credit) 18,00,000
Materials consumed (One month’s credit) 4,50,000
Wages paid (One month lag in payment) 3,60,000

Cash manufacturing expenses (One month lag in payment) 4,80,000

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