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BY

PROF. H.R.SRIPADA SHASTRY


WORKING CAPITAL
OPERATING CYCLE

CASH
2.00
RECEIVABLES
(2M)
12.00 RAW MATERIAL ( 1M)
3.00
FINISHED GOODS
STOCK IN PROCESS (0.5M)
(1M)
2.00
5.00
TOTAL CA:
ANNUAL RM CONSUMPTION : Rs.36 lacs RM : 3.00
ANNUAL C.O.P : Rs.48 lacs SIP : 2.00
FG : 5.00
ANNUAL C.O.S : Rs.60 lacs
RECIVBLS :12.00
ANNUAL GROSS SALES :Rs.72 lacs OTHER CA : 2.00
TOTAL CA :24.00
WC ASSESSMENT - METHODOLOGY

Holding period (in months) are computed as follows:

Holding period of RM =Closing Stock of Raw material X12


Annual Raw material consumption
Hold period of stock-in-process=Closing Stock of SIP X 12
Annual Cost of production
Hold period of finished goods =Closing Stock of FG X 12
Annual Cost of sales
Hold period of Receivables =Receivables outstanding X 12
Annual Sales

Hold period for Cr for RM =Sundry Creditors for RM X12


Annual purchases
(The holding period of each item is computed for last 3 years. Then
the projections may be verified from this.)
WORKING CAPITAL OPERATING CYCLE METHOD

TOTAL CA:
RAW MATERIAL (1M) : 3.00
STOCK-IN-PROCESS (0.5 M) : 2.00
FINISHED GOODS (1M) : 5.00
RECIEVABLES (2M) :12.00
OTHER CA (CASH) : 2.00
TOTAL CURRENT ASSETS : 24.00
LESS:
CL OTHER THAN B.B. : 1.50
WORKING CAPITAL GAP :22.50
LESS:
NWC (25% OF CA) : 6.00
M.P.B.F :16.50
WORKING CAPITAL - TURNOVER METHOD

PROJECTED TURNOVER : 72.00


TOTAL WORKING CAPITAL : 18.00
(TAKING 3M AS OPERATING CYCLE)

LESS:
5% OF PROJECTED TURNOVER AS NWC : 3.60

ELIGIBLE WC LIMIT : 14.40


(BEING 20% OF PROJECTED TURNOVER)

IT MAY BE OBSERVED THAT EWCL AS PER TRADITIONAL METHOD


i.e. OPERATING CYCLE METHOD WORKED OUT EARLIER WAS 16.50,
WHERE AS IN THE ABOVE METHOD, IT IS ONLY 14.40
WC ASSESSMENT - METHODOLOGY
CASH BUDGET METHOD:(Qrtrly)
(i) Business Operations:
All inflows (receipts)-All outflows(payments)
A. Cash surplus / deficit
(ii) Non-business Operations:
All inflows - All outflows
B. Cash surplus /deficit
(iii) Capital Accounts :
All inflows - All payments
C. Cash surplus /deficit
(iv) Sundry items :
All inflows - All outflows
D. Cash surplus /deficit

E. Net of B, C & D
F. Net Cash Gap (A - E) * (As Bank Credit Limit)
WC ASSESSMENT
METHODOLOGY

Cash Budget Method can be extended to-

Seasonal Industry/Construction Contractors:


The Cash Budget method continues to be used in the
case of seasonal industries like sugar, tea & others
and also in construction activity, irrespective of
quantum of working Capital limit sought.
EXAMPLE OF CASH BUDGET METHOD

DETAILS OF IN/OUT FLOWS: I QR II QR III QR IV QR


OPENING BALANCE (B/F) (+)0.50 (+)2.00 (-)5.00 (-)1.00
SALE/CONTRACT +20.00 +23.00 +32.00 +34.00
REALISATION (IN FLOW) HENCE
PURCHASE OF RM -15.00 -27.00 -20.00 -31.00 THE MAX.
(OUTFLOW) NET DEFICIT
IS IN II QR &
OTHER EXPENCES -3.00 -3.00 -3.50 -4.00 CC LIMIT
(OUTFLOW) WILL BE
NET SUR-PLUS (BUSINESS (+)2.00 (-)7.00 (+)8.50 (-)1.00 RS.5.00
OPERATIONS) [A] LACS

FIXED DEPOSIT MATURED +3.00 - - -


(IN FLOW)
LIFE INSURANCE PREMIUM -0.50 - -0.50 -
PAID (OUTFLOW)
NET SUR-PLUS (NON- (+)2.50 (-)0.50 -
BUSINESS OPERATIONS) [B] -

CONCRETE MIXER/EQUIP- +1.00 - +2.00 +0.50


MENTS (OLD) SALE (INFLOW)
TRUCK/VAN/EQUIPMNT (NEW -4.00 - -6.00 -
PURCHASED) (OUTFLOW)
NET DEFICIT (CAPITAL) [C] (-)3.00 - (-)4.00 (+)0.50
NET SURPLUS/DEFICIT (+)2.00 (-)5.00 (-)1.00 (-)1.50