# Estimating working capital requirements

## 1. Estimating working capital requirement using operating cycle method:

### Problem:

X Ltd Co. wants to know working capital by operating cycle methods when :

Estimated Sales 20,000 units @ \$5 P.U.
Production and Sales will remain similar throughout the year.
Production costs: M – 2.5 P.U., Labour 1.00 P.U. Overheads \$17.500.
Customers are given 60 days credit and 50 days credit from suppliers. 40 days supply of raw materials and 15 days supply of finished goods are kept in store.
Production cycle is 20 days. All materials are issued at the commencement of each production cycle. 1/3 on an Average of working capital is kept as cash balance for contingencies.

### Solution:

 (a). Total Op. Exp. for the year. \$ R.M. 20,000 x 250 50,000 Labor 20,000 x 1 20,000 Overheads 17,500 87,500
 (b). Period of Production cycle Days Material storage days (Pds) 40 Finished goods storage pds. 15 Production cycle storage pds. 20 Av. collection pd. 60 135 Less: average payment (crs) 50 85

(c). No. of operating cycle in the year: 365 / 85 = 4.3

(d). Working Capital = 87,500 / 4.3 = \$20,349

Add: Reserve for contingencies 1 / 3 = 6,789 / 27,132

## 2. Using Working Capital Method

### Problem

 \$ Raw Material (needed) 10,000 Store Value 16,000 Average Credit givers: Local sales 2 weeks credit 1,56,000 Outside sales 6 weeks credit 6,24,000 Time lag payment: For purchase (4 weeks) 1,92,000 For wages (2 weeks) 5,20,000

Contingencies Allowances = 15%

Calculate Amount of Working Capital.

### Solution:

Current Assets:

 Inventories: R.M. \$10,000 Stock of Store \$16,000 \$26,000

Account Receivables (Drs)

Local sales = (1,56,000 x 2) / 52 = \$6,000

Outside sales = (6 x 6,24,000) / 52 = \$72,000

Less: Current Liabilities

Accounts Payables (Crs.) = (1,92,000 x 4) / 52 = \$14,770

O/S Wages = (5,20,000 x 2) / 52 = \$20,000

Add: 15% for contingencies = 10,385

Total Working Capital Required = \$79,615

## 3. Using Cash Forecasting Method

### Problem

John Trading Co. wants you to prepare a working capital forecast from the following:

Issued Share Capital: \$4,00,000
8% Deb.: \$1,50,000
The fixed Assets are valued at \$3,00,000
Production: 1,00,000 units.
Expected Ratio of cost to selling price are: R.M. 50%, Wages: 10%, O/Heads: 25% = 85%

Raw material remains in stores for two months, finished goods remain in stores for 4 months, credit allowed by crs. 3 months from the date of delivery of goods (Rm) credit given to Drs. is 3 months from the date of dispatch. Production cycle is 2 months. Sale price per unit is \$6. Production and sale are uniform during the year.

## 3. Using Projected Balance Sheet Method

Libro Ltd. has \$3,50,000 Share Capital, \$70,000 G.R., \$3,00,000 Fixed Assets, \$30,000 Stock, \$97,500 Drs., \$15,000 Crs.

It is proposed to increase the business the stock level by 50% at the end of year. Crs. are doubled. Machinery worth \$15,000 is proposed to be purchased. Estimated profit during the year is \$52,500 after changing \$30,000 Depreciation and 50% of profit for taxation.

Advance income tax is estimated to be \$45,000. Crs. are likely to be doubled 5% dividend be paid and 10% dividend for the next year to be proposed. Drs. are estimated to be outstanding for 3 months. Sales budget shows \$7,50,000 as sales for the year make a working capital forecast by projected Balance Sheet Method.

### Solution

 (i) Sh. Cap. Fixed Assets 3,00,000 Cap. (Given) 3,50,000 3,50,000 M. Proposed Purchase 15,000 Res. and surplus 70,000 Less Dep. 3,15,000 17,500 30,000 Less dividend 10% 52,500 2,85,000 52,500 C.A. + Profit after tax 1,05,000 70,000 Stock 30,000 + 50% Add. Drs. 15,000 45,000 Less proposed Div. 10% 35,000 Adv. Tax 45,000 1,87,500 Current liabilities 2,77,500 Crs. 15,000 + (k) 15,000 30,000 Tax Provision 52,000 Proposed Div. 35,000 O/D (balance figure) 25,000 1,70,500 5,62,500 5,62,000