PRESENTATION ON

COMPUTATION OF WORKING CAPITAL

Presented By MUHAMMED FAHIK K Roll No. 31 2nd SEM MBA

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Working capital management is concerned with the problem that arise in managing the current assets(CA) and current liability(CL) and the interrelationships between them. Its operational goal is to manage the CA and CL in such a way that a satisfactory / acceptable level of net working capital (NWC)is maintained.

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 Estimation of working capital requirement involves two steps Estimation of current asset Estimation of current liability Net working capital = Current Asset Current Liability

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 Estimation of Current Asset

Raw Material inventory Work-in-Process Inventory Finished Goods Inventory

Debtors
Cash

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Budgeted production x Cost of RM x Avg inventory holding (in unit) (per unit) period of RM

a) Raw Material Inventory =

52weeks/12 months/365 days

b) work-in-Process Inventory
Budgeted production x estimated WIP cost x Avg inventory holding (in unit) (per unit) period of WIP

=
52weeks/12 months/365 days

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c) Finished Goods Inventory

Budgeted production x cost of goods produced x finished goods holding (in unit) (per unit) period

=
52weeks/12 months/365 days

Budgeted credit sales x cost of goods sold x Avg debt collection (in unit) (per unit) period

d) Debtors =
52weeks/12 months/365 days

e) Cash and Bank Balance Page 6

 Estimation of Current Liability Trade creditors Direct Wages Overheads

Budgeted yearly Production x RM cost x credit period allowed (in unit) (per unit) by creditors
a) Trade creditors = 52weeks/12 months/365 days

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Budgeted yearly Production x direct labour cost x Avg time lag in (in unit) (per unit) payment of wages b) Direct wages = 52weeks/12 months/365 days

Budgeted yearly production x overhead cost x Avg time lag in payment (in unit) (per unit) of overhead

c) Overheads =
52weeks/12 months/365 days

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Determination of working capital Requirement for a firm

Particulars 1.Current Asset a) Raw Material Inventory b) Work-in-Process Inventory c) Finished Goods Inventory d) Debtors c) Cash Total Current Asset 2.Current Liability a) Creditors b)Wages c)Overheads Total Current Liability (B) .. .. .. xxxxxxxxx (A) .. .. .. .. .. xxxxxxxx Amount (Rs)

Net Working Capital (A) (B)

Add Margin far contingency Net Working Capital Required

xxxxxxxxx
xxxxxxxxx

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Points to be remembered while estimation of WC requirement

profit should be ignored while calculating WC requirement for the following reason profit may or may not be used as WC Even if it is used it may be reduced by the amount of income tax, drawing, Dividend paid etc Depreciation shall not be considered.

WIP cost is estimated using either of the formulas

1) 50% of cost of production is taken

2) Full cost of RM + (50% of wages+50% of overheads)

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