Dr. Mrs. Manisha V. Jagtap.

Assistant Professor, Dept. of Management Studies (MBA),

Rajarambapu Institute of Technology, Islampur.
 Unit - 3

The Management Working Capital

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 2
WORKING CAPITAL:
 Working Capital is a part of the capital which is needed for meeting day to day
requirement of the business concern.
 For example, payment to creditors, salary paid to workers, purchase of raw
materials etc., normally it consists of recurring in nature.
 It is calculated as the current assets minus the current liabilities.
 It can be easily converted into cash. Hence, it is also known as short-term capital.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 3
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Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
VALUE BASED/CONCEPTUAL BASED WORKING CAPITAL:
1. Gross working capital (GWC):
 GWC refers to the firm’s total investment in current assets.
 The current assets employed in business give the idea about the utilization of
working capital and idea about the economic position of the company.
2. Net working capital (NWC):
 Net working capital means current assets minus current liabilities. The difference
between current assets and current liabilities is called the net working capital.
 If the net working capital is positive, business is able to meet its current liabilities.
Net working capital concept provides the measurement for determining the
creditworthiness of company.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 5
1. Permanent Working Capital:
 This type of working capital is known as Fixed Working Capital.
 Permanent working capital means the part of working capital which is
permanently locked up in the current assets to carry out the business smoothly.
 The minimum amount of current assets which is required to conduct the business
smoothly during the year is called permanent working capital.
 Permanent working capital is permanently needed for the business and therefore
it should be financed out of long-term funds.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 6
2. Temporary or Variable Working Capital:
 The term variable working capital refers that the level of working capital is
temporary and fluctuating.
 It represents the additional current assets required at different times during the
operating year to meet additional inventory, extra cash, etc.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 7
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Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 (A) Current Assets: These assets are  (B) Current Liabilities: Current
generally realized within a short liabilities are those which are
period of time, i.e. within one year. generally paid in the ordinary
Current assets include: course of business within a short
 (a) Inventories or Stocks :
period of time, i.e. one year.
Current liabilities include:
 (i) Raw materials (ii) Work in
 (a) Sundry Creditors
progress (iii) Consumable Stores (iv)
Finished goods  (b) Bills Payable
 (b) Sundry Debtors  (c) Accrued Expenses
 (c) Bills Receivable  (d) Bank Overdrafts
 (d) Pre-payments  (e) Bank Loans (short-term)
 (e) Short-term Investments  (f) Proposed Dividends
 (f) Accrued Income and  (g) Short-term Loans
 (g) Cash and Bank Balances  (h) Tax Payments Due
9
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
OPERATING CYCLE:
 Operating cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash.
 The operating cycle of a manufacturing company involves three phases:
 Acquisition of resources such as raw material, labour, power and fuel etc.
 Manufacture of the product which includes conversion of raw material into
work-in-progress into finished goods.
 Sale of the product either for cash or on credit. Credit sales create account
receivable for collection.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 10
 Operating Cycle
of Working
Capital

11
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 The Working Capital Cycle for a business is the length of time it takes to convert
the total net working capital (current assets less current liabilities) into cash.
 Businesses typically try to manage this cycle by selling inventory quickly,
collecting revenue from customers quickly, and paying bills slowly to
optimize cash flow.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 12
 This cycle plays a major role in determining the efficiency of a business.
The better a business owner understands the company's operating cycle, the better
that owner will be able to make decisions for the benefit of the business.
A company can reduce its OC in two ways:
 Speed up the sale of its inventory: If a company is able to quickly sell its
inventory, the OC should decrease.
 Reduce the time needed to collect receivables: If a company is able to quickly
collect credit sales more quickly, the OC would decrease.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 13
 In order to determine a company's efficiency, business owners need to calculate
their operating cycle. Follow these steps to make this calculation:
1. Determine the inventory period
 A business owner first needs its company's inventory period when calculating its
operating cycle. An inventory period refers to how long a company holds its
inventory before it's sold. The inventory period can be calculated as follows:
 Inventory period = 365 / inventory turnover
 To determine a company's inventory turnover, divide the cost of goods sold by the
average inventory. The average inventory refers to the average of a company's
opening and closing inventory. This can be found on the company's balance sheet,
whereas the cost of goods sold can be found on the company's income statement.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 14
2. Determine the company's accounts receivable
 Business owners also need to know their accounts receivable in their operating
cycle calculation. Accounts receivable refers to the amount of money a customer
owes a company. Accounts receivable can be calculated as follows:
 accounts receivable period = 365 / receivables turnover
 To determine a company's receivables turnover, divide credit sales by the average
accounts receivable.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 15
3. Determine the company's accounts payable
 Business owners also need to know their accounts payable in their operating cycle
calculation. Accounts payable refers to the amount of money a company owes a
supplier. Accounts payable can be calculated as follows:
 accounts payable period = 365 / payables turnover
 To determine a company's payables turnover, divide credit purchases by the
average accounts payable.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 16
4. Calculate the operating cycle
 The following formula can be used for calculating the operating cycle:
 Operating Cycle (cash conversion cycle) = Inventory Period + Accounts
Receivable Period – Accounts Payable Period
 The resulting number is the number of days in the company's operating cycle.
Example:
 Inventory days = 85
 Receivable days = 20
 Payable days = 90
 Working Capital Cycle = 85 + 20 – 90 = 15
 This means the company is only out of pocket cash for 15 days before receiving full
payment.
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 17
 The following are a few advantages of adequate working capital funds in the
business:
1. Cash Discount - If proper cash balance is maintained the business can avail of
the cash discounts facilities offered to it by the suppliers.
2. Liquidity and Solvency - The proper administration of working capital enhances
the liquidity in funds, solvency and credit - worthiness of the concern.
3. Meeting Contingencies- It provides funds for unforeseen emergencies so that a
business can successfully sail through the periods of crisis.
4. High Morale - The provision of adequate working capital improves the morale of
the executives and their efficiency leads it to higher peak.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 18
5. Good Bank Relations- Good relations with banks can also be maintained. The
enterprise by maintaining an adequate amount of working capital is able to
maintain a sound bank credit, trade credit and can escape insolvency.
6. Fixed Assets Productivity is Increased - Fixed assets of the firm cannot work
without proper amount of working capital. Without it fixed assets are like guns
which cannot shoot as there are no cartridges.
7. Research and Innovation - No research, innovation and technical developments
are possible to be undertaken without sufficient amount of working capital.
8. Expansion Facilitated - The expansion of a firm is highly successful, if it is
financed through own working capital.
9. Profitability Increased - The profitability of a concern also depends on the right
proportion of fixed assets and current assets. Every activity of the business
directly or indirectly affects the current position of the enterprise, hence, its
need should be properly estimated and calculated

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 19
Factors Affecting Working Capital Requirements The working capital requirement
of a concern depends upon a large numbers of factors. These are:
1. Nature of Business: The requirement of working capital also varies among
the enterprises depending upon the nature of the business.
2. Scale of Operations: The working capital requirement of a concern is directly
influenced by the size of its business which may be measured in terms of scale
of operations.
3. Nature of Production Technology: In case of labour intensive technology, the
unit will need more amount to pay the wages and, therefore, will require more
working capital. On the other hand, if the production technology is capital-
intensive, the enterprise will have to make less payment for expenses like
wages. As a result, enterprise will require less working capital.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 20
4. Length of Production Cycle: In manufacturing business the requirement of
working capital increases in direct proportion of length of manufacturing
process. Longer the process period of manufacture, larger is the amount of
working capital required.
5. Seasonal Variation: In certain industries raw material is not available through
out the year. They have to buy raw materials in bulk during the season to ensure
and uninterrupted flow and process them during the entire year.
6. Operation Efficiency: Operating efficiency entails how fast you can convert raw
materials to finished goods, sell these finished products and claim your
payments from customers.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 21
7. Credit Policy: The credit policy of a concern in its dealing with debtors and
creditors influence considerably the requirement of working capital. A concern
that purchases its requirement on credit and sell its products/services on cash
require lesser amount of working capital and vice versa.
8. Business Cycle: Business cycle refers to alternate expansion and contraction in
general business activity. In a period of boom i.e., when the business is
prosperous, there is a need of larger amount of working capital due to increase
in sales, rise in prices.
9. Rate of Growth of Business: The working capital requirement of a concern
increase with the growth and expansion of its business activities.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 22
The excess working capital refers to the idle working capital or idle funds in
business which Causes losses to the firm. The following are the consequences of the
excess working capital in any organization:
 excess cash yields no returns and results in miss use of funds and the interest what
the firm incurs on excess cash is a direct loss,
 excess inventories cause deterioration in quality, sometimes fall in prices followed
by wastage and mishandling, and .
 excess debtors are likely turned out-to-bad debts. Thus, firms do experience risks
without optimum working capital and therefore; every firm should have optimum
level of working capital only.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 24
 Investment in current assets may some times be inadequate i.e., less than what is
required. This inadequate. working capital causes various financial problems.
Such as:
i) cash shortage causes cash-out and liquidity problems. Further firms losses
business opportunities and at times forego discounts on bulk purchases.
ii) lack of maintenance of adequate levels of raw material affect on the production
activities and thereby adverse effect on sales.
iii) inability to maintain sufficient levels of finished goods for want of working
capital limits sales , opportunities and thereby, firm's profits will be poor as such
firms will not grow further.
iv) firms may feel great inconvenience to implement projects-due to lack of
sufficient working capital.
v) firms do not pay bills and dues timely, thereby looses reputation and goodwill.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 25
 1) Trade Credit

2) Accrued Expenses

3) Deferred incomes

4) Commercial Paper (CP)

5) Certificate of Deposit (CD)

6) Letter of Credit (LC)

7) Bank Finance

8) Factoring
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Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 1) Trade Credit :
 Trade Credit is an arrangement between two consenting parties (generally a buyer
and a seller/supplier), under which goods and services are provided by the seller
/ supplier without making prompt cash payment by the buyer, on a condition to
make payment within an agreed time period.
 2) Accrued Expenses:
 Accrued expenses are the expenses, which a business organization owes to others
(individual or another business organization), but have not been paid as they have
not yet become due. They are liability for a company, as they arise due to the goods
or services, which are already availed by the company. The payment against such
supply of goods or services would require to be made when the same becomes
due, which is a future date.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 27
3) Deferred incomes:
 These are incomes received in advance by a business organization for the supply
of goods or services at some future date. They are basically liabilities for an
organization.
4) Commercial Paper (CP) :
 This is an unsecured instrument supported by the promise of the issuer or his
banker for the payment of the face value on the due date specified on the paper.
5) Certificate of Deposit (CD) :
 CD is a tradable bank deposit and transferable from one holder to another, till the
maturity of the underlying bank deposit. Interest is paid in the normal course to the
holder of the instrument.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 28
6) Letter of Credit (LC) :
A Letter of Credit (LC) is a facility extended by a buyer's bank, under which the bank
helps the customer in obtaining credit from the suppliers. It is a form of a guarantee
given by the bank, on behalf of its customer, for certain purchases made by it.
In case of customer's failure to make the timely payment, it becomes the
responsibility of letter of credit opening bank to honour the commitment of its
customer.
7) Bank Finance :
 (a) Loans: Commercial banks generally provide short-term loans up to one year for
meeting working capital requirements. In case of a loan, a specified amount is
sanctioned by the bank to the customer. The entire loan amount is paid to the
borrower either in cash or by credit to his account. The borrower is required to pay
interest on the entire amount of the loan from the date of the sanction

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 29
 (b) Cash Credits: A Cash Credit facility is working capital finance extended by a
commercial bank to its borrowers against the primary security of current assets,
like inventory, sundry debtors, etc.
 (c) Overdrafts: Overdrafts is another way of bank finance. Under this
arrangement, banks allow their esteemed customers to withdraw beyond the
balance available in their account. This is extremely useful in cases where a
company is suffering from short-term cash flow problem and does not require
large amount of funds on a long-term basis.
 (d) Purchasing and Discounting of Bills: The seller draws a bill of exchange on the
buyer of goods on credit. The bank purchases the bills payable on demand and
credits the customer’s account with the amount of bill less discount. At the
maturity of the bills, bank presents the bill to its acceptor for payment.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 30
8) Factoring:
 A factor is a financial institution which offers services relating to management and
financing of debts arising out of credit sales. It provide finance to the business firm
by discounting the bills or invoices of its customers.
 Thus, a firm gets immediate payment for sales made on credit. Accounts receivable
are discounted in order to allow the factor to make a profit upon the settlement of
the debt.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 31
 Working capital management helps maintain the smooth operation of the net
operating cycle, also known as the cash conversion cycle— the minimum amount
of time required to convert net current assets and liabilities into cash.
 Working capital management can improve a company's cash flow management
and earnings quality through the efficient use of its resources.
 Management of working capital includes inventory management as well as
management of accounts receivable and accounts payable.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 32
There can be multiple objectives of a working capital management, including:
1. Meeting obligations: Working capital management should always ensure that the
business has enough liquidity to meet its short-term obligations, often by
collecting payment from customers sooner or by extending supplier payment
terms.
2. Growing the business: Funds tied up in working capital tend to earn little, or no,
return. Hence, a company with a high level of working capital may fail to achieve
the return on capital employed expected by its investors.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 33
 FORMAT:
In the books of _____
Statement of Working Capital Requirement for the period ……..

Particulars Amount Amount

(A) Current Assets: Stock of Raw Material **
Stock of W.I.P. **
Stock of Finished goods **
Debtors **
Prepaid Expenses **
Cash in hand / Bank ** ***
Less: (B) Current Liabilities: Creditors **
O/S Expenses **
Bank overdraft ** ***
Working Capital (A-B) ****
Add: Safety margin **
Total Working capital required ***** 35
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 The management of Vipro Ltd. has called you for ascertaining the working capital
needed to finance a level of activity of 30,000 units of output for the year 2020.
The cost structure for the company is as follows:
Particulars Cost (per Unit) in ₹
Direct Raw material 20
Direct Labour 5
Direct Overheads 15
Total Cost 40
Profit 10
Selling Price 50

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 36
Additional Information:
a) Past tends indicates that raw materials are held in stock on an average for two
months.
b) Work in progress will approximate to half a monthly production.
c) Finished goods remain in the warehouse on an average for one month.
d) Suppliers for materials extend one month’s credit.
e) For debtors two months credit is usually allowed.
f) A minimum cash balance of Rs. 25000 is expected to be maintained.
g) The production pattern is assumed to be uniform throughout the year.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 37
 Statement showing Total cost & sales
Units Total Amount
Particulars Cost P.U. produced (₹)
Direct Raw material 20.00 30000 6,00,000.00
Direct labour 5.00 30000 1,50,000.00
Direct Overheads 15.00 30000 4,50,000.00
Total Cost 40.00 30000 12,00,000.00
Profit 10.00 30000 3,00,000.00
Selling Price 50.00 30000 15,00,000.00

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 38
1. Raw Material requirement: Two months
12 months = 600000
2 months = ??? =100000
2. Work in progress requirement: Half a month
a. Direct Raw material= 1/2 month (100%)
12 months = 600000
1/2 months = ??? =25000
b. Direct Labour = 1/4 month (50%)
12 months = 150000
1/4 months = ??? =3125
c. Direct Overheads = 1/4 month (50%)
12 months = 450000
1/4 months = ??? =9375
a+b+c = 37500
39
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
3. Finished goods requirement: one month.
12 months = 1200000
1 months = ??? =1,00,000
4. Suppliers requirement: one month
12 months = 600000
=50,000
1 months = ???
5. Debtors requirement: Two Months
12 months = 1200000
=2,00,000
2 months = ??? (on cost)
6. Cash Requirement = 25000

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 40
 Statement of Working Capital Requirement for the year 2020

Particulars Amount Amount

Current Assets: Stock of Raw Material 1,00,000

Stock of W.I.P. 37,500

Stock of Finished goods 1,00,000

Debtors 2,00,000

Cash in hand / Bank 25,000 4,62,500

Less: Current Liabilities: Creditors 50,000 50,000

Total Working capital required 4,12,500

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 41
A Proforma cost sheet of Ricks company, Kolhapur provides the following
information :
Particulars Cost per unit (₹)
Raw Material 80
Direct Labour 30
Overheads 60
Total Cost 170
Profit 30
Selling Price 200
The following further particulars are available:
1. Raw materials are in stock on an average one month.
2. Materials are in process on average half a month.
42
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 3. Finished goods in stock on an average one month.
4. Credit allowed by supplier is one month & credit allowed to debtors is two
months.
5. Lag in payment of wages is one and half month, lag in payment of overheads
expenses is one month.
6. Cash in hand and at bank is expected to be Rs. 40000/-.
You are required to prepare a statement showing the working capital needed to
finance a level of activity of 10,400 units of production. You may assume that
production is carried out evenly thorough out the year.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 43
 Statement showing Total cost & sales
Units
Particulars Cost P.U. Total Amount (₹)
produced

Direct Raw material 80.00 10400 8,32,000.00

Direct labour 30.00 10400 312,000.00
Direct Overheads 60.00 10400 6,24,000.00
Total Cost 170.00 10400 17,68,000.00
Profit 30.00 10400 3,12,000.00
Selling Price 200.00 10400 20,80,000.00

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 44
1. Raw Material requirement: One months
12 months = 832000 1 month = ??? 69333.33

2. Work in progress requirement: Half a month

a. Direct Raw material= 1/2 month (100%)
12 months = 832000 1/2 month = ??? 34666.67
b. Direct Labour = 1/4 month (50%)
12 months = 312000 1/4 month = ??? 6500.00

c. Direct Overheads = 1/4 month (50%)

12 months = 624000 1/4 month = ??? 13000.00

a+b+c = 54166.67

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 45
3. Finished goods requirement: one month.
12 months = 1768000 1 month = ??? 147,333.33

4. Supliers requirement: one month

12 months = 832000 1 month = ??? 69,333.33
5. Debtors requirement: Two Months
12 months = 1768000 2 months = ??? (on cost) 294,666.67
6. Lag in payment of wages : one and half month
12 months = 312000 1.5 months = ??? 39,000.00
7. Lag in payment of overheads : one month.
12 months = 624000 1 month = ?? 52,000.00
8. Cash Requirement =?? 40,000.00

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 46
 Statement of Working Capital Requirement for the year ---
Particulars Amount Amount

Current Assets: Stock of Raw Material 69,333.33

Stock of W.I.P. 54,166.67
Stock of Finished goods 147,333.30

Debtors 294,666.70

Cash in hand / Bank 40,000.00 6,05,500.00

Less: Current Liabilities: Creditors 69,333.33

O/S Wages 39,000.00

O/S Overheads 52,000.00 1,60,333.33

Total Working capital required 4,45,166.67

47
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 Estallia Garment Co. Ltd. is a famous manufacturer and exporter of garments to
the European countries. The finance manager of the company is preparing its
working capital forecast for the next year. After carefully screening all the
documents, he collected the following information:
Production during the previous year was 150000 units. The same level of activity
is intended to maintain during the current year.
The expected ratios of cost to selling price are:
Raw materials 40%
Direct Wages 20%
Overheads 20%

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 49
Additional Information:
1. The raw material remains in stores for 3 months before production.
2. Every unit of production remains in process for 2 months.
3. Finished goods remain in warehouse for 3 months.
4. Credit allowed by the creditor is 4 months from the date of delivery of raw
material and credit given to debtors is 3 months from the date of dispatch.
5. The estimated balance of cash to be held Rs. 20000
6. Lag in payment of wages ½ month.
7. Lag in payment of expenses ½ month.
8. Selling price is Rs. 10 per unit.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 50
 Statement showing Total cost & sales
Units Total Amount
Particulars Cost P.U.
produced (₹)
Direct Raw material 4.00 150000 6,00,000
Direct labour 2.00 150000 3,00,000
Direct Overheads 2.00 150000 3,00,000
Total Cost 8.00 150000 12,00,000
Profit 2.00 150000 3,00,000
Selling Price 10.00 150000 15,00,000

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 51
1. Raw Material requirement: Three months
150000.00
12 months = 600000 3 month = ???

2. Work in progress requirement: Two months

a. Direct Raw material= 2 months (100%)
12 months = 600000 2 months = ??? 100000.00
b. Direct Labour = 1 month (50%)
25000.00
12 months = 300000 1 month = ???
c. Direct Overheads = 1 month (50%)
12 months = 300000 1 month = ??? 25000.00

a+b+c = ?? 150000.00

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 52
 3. Finished goods requirement: Three months.
300,000.00
12 months = 1200000 3 month = ???
4. Creditors requirement: Four months
200,000.00
12 months = 600000 4 months = ???
5. Debtors requirement: Three Months
12 months = 1200000 3 months = ??? (on cost) 300,000.00

6. Lag in payment of wages : half month

12 months = 300000 0.5 month = ??? 12,500.00

7. lag in payment of overheads : Half month.

12,500.00
12 months = 300000 0.5 month = ???
8. Cash Requirement = ??? 20,000.00

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 53
 Statement of Working Capital Requirement for the year ----

Particulars Amount Amount

Current Assets: Stock of Raw Material 150000.00

Stock of W.I.P. 150000.00
Stock of Finished goods 300000.00

Debtors 300000.00

Cash in hand / Bank 20000.00 920000.00

Less: Current Liabilities: Creditors 200000.00

O/S Wages 12500.00

O/S Overheads 12500.00 225000.00

Total Working capital required 695000.00

54
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
Zeal Company is desirous to purchase a business & has consulted you & expects
report exhibiting the average amount of working capital which will be required in
the first year’s working.
 Following information is provided to you & instructed to add 10% as contingency
and Assume that production is sustained at an even pace during the 52 weeks of
the year.

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 55
 Particulars Estimated Amount for
the year (₹)
1. Average Amount locked up in
a) Stock of finished goods 5000
b) Stock of stores & material etc. 8000
2. Average credit given:
a) Inland sale (4 weeks) 312000
b) Export sale (12 weeks) 78000
3. Lag in payment of expenses:
a) Wages (1week) 260000
b) Stores (6 weeks) 48000
c) Rent (8 weeks) 10000
d) Misc. exp. (6 weeks) 4800
4. Payment in Advance:
a) Sundry Expenses (paid quarterly in advance) 8000

56
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.
 1. Debtors Requirement:
(a) Inland Sale = 4 weeks
52 weeks = 312000 4 weeks = ?? 24000.00
(b) Export sale= 12 weeks
52 weeks = 78000 12 weeks =?? 18000.00
2. Lag in payment of wages :1 week
52 weeks = 260000 1 week = ?? 5000.00

3. Lag in payment of Stores: 6 weeks

52 weeks = 48000 6 weeks = ??
5538.46

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 57
4. Lag in payment of rent : 8 weeks
52 weeks = 10000 8 weeks = ?? 1538.46

5. Lag in payment of Misc. exp. : 6 weeks

52 weeks = 4800 6 weeks = ?? 553.85

6. Prepaid sundry expenses: quarterly in advance

12 month = 8000 one quarter = ?? 2000.00

Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur. 58
 Statement of Working Capital Requirement for the year ----
Particulars Amount Amount
Current Assets: Stock of Raw Material 8,000.00
Stock of Finished goods 5,000.00
Debtors (Inland Sale) 24,000.00
Debtors (Export Sale) 18,000.00
Prepaid sundry expenses 2,000.00 57,000.00
Less: Current Liabilities: O/S Wages 5,000.00
O/S Stores 5,538.46
O/S Misc exp. 553.85
O/S rent 1,538.46 12,630.77
Net working capital 44,369.23
add: 10% contingency 4436.92
Total Working capital required 48,806.15 59
Dr. Mrs. Manisha V. Jagtap. Asst. Professor, Dept. of Management Studies (MBA), RIT, Islampur.