Page 241 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Solution: Calculation of net operating cycle period of XYZ Ltd.

Raw material storage period =

= = 30 days

WIP Holding period (b) =

=  


Finished goods storage period (c)=

= 


Debtors Collection Period (d) 45 days
Total operating cycle (a) + (b) + (c) + (d) 115
Less. Avg. credit period availed 30
Net operating cycle period 85

No. of operating cycle in a year = 4.2 times

10.4.1 Estimate of Future Working Capital based on Current Assets and
Current Liabilities

The estimate of future working capital can be made if the amount of current assets and current
liabilities can be estimated as follows:

The various constituents of current assets and current liabilities have a direct bearing on the
computation of working capital and the operating cycle. The holding period of various constituents
of operating cycle may either contract or expand the net operating cycle period. Shorter the
operating cycle period, lower will be the requirement of working capital and vice versa.

Estimation of Current Assets

The estimates of various components of working capital may be made as follows:
1. Raw material inventory: If the funds to be invested in raw materials/inventory may be
estimated on the basis of production budget, the estimated cost per unit and the average
holding period of raw material inventory by using the following formula.

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