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Unit 10: Working Capital Management
10.4.2 Working Capital Requirement based on Cash Cost Notes
This approach is based on the fact that in the case of current assets, like sundry debtors and
finished goods etc., The exact amount of funds blocked is less than the amount of such current
assets.
Many experts, therefore, calculate the working capital requirements by working out cash cost of
finished goods and sundry debtors. Under this approach the debtors are calculated not as a
percentage of sales value but as a percentage of cash costs. Similarly, finished goods are valued
according to cash costs.
10.4.3 Effect of Double Shift Working on Working Capital Requirements
The increase in the number of hours of production has an effect on the working capital
requirements. The economy of introducing double shift is the greater use of fixed assets with
little or marginal requirement of additional assets. In double shift working, an increase in
stocks will be required but with double shift working, the increase in stocks will not be
proportionate to the rise of production. Hence the minimum level of stocks may not be very
much higher.
The amount of materials in process will not change due to double shift working. Since work
started in the first shift will be completed in the second, hence capital tied up in materials in
process will be the same as with single shift working. As such, the cost of work-in process, will
not change unless the second shift workers are paid at a higher rate. Fixed overheads will
remain fixed, whereas variable overheads will increase in proportion to the increased production.
Semi-variable overheads will increase according to the variable element in them.
Self Assessment
Fill in the blanks:
7. The various constituents of current assets and current liabilities have a direct bearing on
the computation of working capital and the ………………… .
8. ………………… the operating cycle period, lower will be the requirement of working
capital.
10.5 Working Capital Policy
Two important issues in formulating the working capital policy are:
1. What should be the ratio of current assets to sales?
2. What should be the ratio of short term financing to long-term financing?
10.5.1 Current Assets in Relation to Sales
If the firm can free cash accurately its level and pattern of sales, inventory procurement time,
inventory usage rates, level and pattern of production, production cycle time, split between cash
sales and credit sales, collection period and other factors which impinge on working capital
components. The investment in current assets can be defined uniquely. When uncertainty
characterizes the above factors, as it usually does, the investment in current assets cannot be
specified uniquely. In face of uncertainty, the outlay on current asset would consist of a base
component meant to meet normal requirements and safety component meant to cope with
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