Working Capital

9 Management
CHAPTER

THEORY
Meaning of working ‰ It refers to the amount of capital which is required for day to day
capital operations of the business.
‰ It is a measure of both a company’s efficiency and its short-term
financial health.
‰ From Value point of view, working capital can be defined as:
(a) Gross Working Capital: It means the firm’s investment in total
current assets.
(b) Net Working Capital: It refers to the difference between the total
current assets and current liabilities. In other words, it is portion
of current assets which is financed through long term funds of the
firm.
‰ From the point of view of time, working capital can be defined as:
(a) Permanent Working Capital: It is that minimum level of
investment in the current assets which is required at all times to
carry out minimum level of business activities.
(b) Temporary Working Capital : It refers to that part of total working
capital which is required by a business over and above permanent
working capital.
Factors to be (a) Nature of business: Generally the small trading concern or retails
considered for shops will have lower requirement of working capital because their
determining the operating cycle will be small and vice versa.
requirement of (b) Size of business: Larger the scale of operations, larger will be the
working capital firm’s working capital requirements and vice versa.
(c) Manufacturing cycle: It is the time period between the purchase
of raw material and converting them into finished product. Larger
the manufacturing cycle, larger will be the firm’s working capital
requirements and vice versa.
(d) During the boom period the business grows
rapidly and thus requires more working capital and vice versa.
 (e) Credit policy: Liberal credit policy will lead to higher credit sales,
higher book debts and higher working capital and vice versa.
(f) Growth and expansion: The large sized business require more
permanent and variable working capital in comparison to small
business.
(g) By better utilization of resources, operating
costs will be reduced which will reduce the pressure on working capital.
(h) Price level changes: Generally, rising price level requires a higher
investment in working capital because increased investment is required
to maintain the same level of current assets.
Repercussions of (a) It puts at rest the development of the firm because due to inadequate
paucity of working working capital management is unable to implement the profitable
capital projects.
(b) In absence of adequate working capital, fixed assets cannot be utilized
fully. As a result, return on investment decreases.
(c) Management cannot take advantage of business opportunities.
(d) The production process stops due to lack of raw material. Decrease in
stock of finished goods causes loss of sales.
(e) Due to inability to pay short term liabilities in time, goodwill of the firm
is adversely affected.
Effects of excess (a) Excessive working capital causes more inventory. As a result, chances
working capital of theft and misuse of stock increase.
(b) It results in adaption of too liberal policy and chances of slackening of
collection of receivables. As a result, the chances of bad debt increase
and profits decreases.
(c) It results in excessive cash holding. Thus, profitability decreases as a
result of idle cash.
(d) The tendency to accumulate excessive inventory is encouraged for
making speculative profits so as to make dividend policy more liberal.
In case the firm is unable to make speculative profits, liberal dividend
policy can’t be maintained.
Management of ‰ Working capital plays a similar role as blood in a living body.
Working Capital ‰ It has to be effectively managed keeping in mind the 3Es i.e. Economy,
Efficiency and Effectiveness.
‰ It can be further studied in two ways i.e. liquidity & profitability and
Investment & Financing Decisions.
Investment of It is the amount to be invested in current assets which depends on various
Working Capital factors such as:
‰ Nature of industry
‰ Type of products
‰ Volume of sales
‰ Credit policy

Working Capital Management 257

Meaning of Working It means what portion of working capital should be financed with long
term sources of funds such as equity share capital, preference share capital,
debentures etc. and what potion of working capital should be financed with
short term sources such as trade credit, short term bank credit etc.
Approaches of Comparative study of Aggressive, Conservative & Matching Approach
Financing of Basis of Aggressive Conservative Matching
Working Capital comparison Approach Approach Approach
1. Permanent Some portion All permanent All permanent
Current financed with current assets current assets
Assets short term are financed are financed
sources of funds with long term with long term
sources of funds. sources of
Some portion funds.
financed with
long term
sources of funds
2. Temporary All temporary Some portion All temporary
Current current assets financed with current assets
Assets are financed long term are financed
with short term sources of funds with short
sources of funds. term sources of
Some portion funds.
financed with
short term
sources of funds
3. Liquidity Lower Higher Moderate
4. Profitability Higher Lower Moderate
Current Assets to ‰ A company requires both current assets and fixed assets to operate
Fixed Assets Ratio upto a level of output.
‰ If current assets to fixed assets ratio is high (assuming constant fixed
assets) then it indicates conservative current assets policy.
‰ If current assets to fixed assets ratio is low (assuming constant fixed
assets) then it indicates aggressive current assets policy.
Operating Cycle It is the duration of time between acquisition of supplies and the collection
of cash from receivables.
Operating cycle of It is the length of the time required:
(a) to convert cash into inventory of finished goods
(b) to convert inventory of finished goods into receivables
(c) to convert receivables into cash.
Operating Cycle = S + D: C
Where, S = Stock holding period
D = Debtors collection period
C = Creditors payment period

258 Financial Management PW

Operating cycle of It is the length of the time required:
(a) to convert cash into inventory of raw materials
(b) to convert inventory of raw materials into work-in-progress
(c) to convert inventory of work-in-progress into finished goods
(d) to convert inventory of finished goods into receivables
(e) to convert receivables into cash.
Operating Cycle = R + W + F + D: C
Where, R = Raw material storage period
W = Work-in-progress holding period
F = Finished goods storage period
D = Debtors collection period
C = Creditors payment period
Components of Average stock of work-in-progress
operating Cycle (a) Raw material storage period =
Average cost of production
n per day
Average stock of finished goods
(b) Work-in-Progress storage period =
Average cost of goods sold per day
Average stock of finished goods
(c) Finished goods storage period =
Average cost of goods sold per day
Average debtors
(d) Debtors collection period =
Average credit sales per day
Average creditors
(e) Creditors payment period =
Average credit purchases per day
Number of 365 or360
operating cycles Number of operating cycles =
Net Operating Cycle Period
Amount of Working Annual operating cost
capital based on Amount of working capital =
Number of operating cycles
operating cycle Annual operating cost
× Net operating cycle period
360
Estimation of Annual raw material cost
Current Assets ‰ Raw Material Inventory = × Average
365 days or 12 months or 52 weeks
raw material storage period
Annual factory cost
‰ WIP Inventory = × Average WIP
365 days or 12 months or 52 weeks
storage period
Annual Cost of Production
‰ Finished goods Inventory = ×
365 days or 12 months or 52 weeks
Average FG storage period
Annual Credit sales
‰ Debtors = × Average debtors
365 days or 12 months or 52 weeks
collection period

Working Capital Management 259

Estimation of Annual Credit purchases
Current liabilities ‰ Trade payables = × Average creditors
365 days or12 months or 52 weeks
payment period
Annual Expenses
‰ Outstanding Expenses = × Average
365 days or 12 months or 52 weeks
lag in payment of expenses

Cash Cost of This approach is based on the fact that in the case of current assets, like
Working Capital sundry debtors and finished goods, etc., the exact amount of funds blocked
is less than the amount of such current assets. While computing cash cost of
working capital, all non-cash costs such as depreciation etc. should not be
considered.

Effect of Double (a) Raw Materials: Stock requirements as regards units, may double since
Shift on Working consumption per day will be twice as earlier. However, due to bulk
Capital purchasing, the firm may get quantity discounts.
(b) Work-in-progress: there will be no change in the quantity of work-in-
progress since work commenced in first shift will be completed in the
second and vice-versa. At the end of the day, the average quantity of
work-in-progress remains the same.
(c) Finished Goods: due to greater production, finished goods stocks may
double in quantity but cost of production per unit may be reduced due
to lower cost of raw materials, economies of fixed costs etc.
(d) Debtors: increase in demand and increased sales will lead to higher
amount of debtors, for the same credit period but the increase may
not be proportional or it may not double in case of reduction in credit
period. Also discounted selling price may be offered in order to sell the
increase production.
(e) Creditors: Due to bulk purchasing and better bargaining power the
firm may avail extended credit period for payment. Unless otherwise
specified, the amount of creditors may double.
(f) Overheads : Fixed overheads will remain same irrespective of double
shift working while the variable overheads will increase in proportion
to the increased production. Semi-variable overheads will increase
according the variable element in them.

Working Capital It can be done from two sources:

Finance (a) Spontaneous Sources – These sources are natural in business operations
e.g. trade credit, bills payable, accrued expenses etc.
(b) Negotiated sources – These sources are specifically negotiated for
business e.g. bank loan, commercial papers, inter-corporate loans, bill
discounting, public deposits, factoring etc.

260 Financial Management PW

 The Reserve Bank of India set up in 1974 a study group under the chairmanship
Maximum
of Mr. P.L. Tandon, popularly referred to as The Tandon Committee.
Permissible Bank
Financing (MPBF) – Lending Norms:
Tandon Committee (I) The borrower has to contribute a minimum of 25% of working capital
gap from long term funds.
MPBF = 75% of (Current assets – Current liabilities) = 75% × Net
Working Capital
(II) The borrower has to contribute a minimum of 25% of the total current
assets from long term funds.
MPBF = (75% of Current assets) – Current liabilities
(III) The borrower has to contribute the entire hard core current assets and
a minimum of 25% of the balance of the current assets from long term
funds.
MPBF = (75% of Soft Core Current assets) – Current liabilities

Core Current The term “Core Current Assets” was framed by Tandon Committee and it is
Assets or Hard Core that part of the current assets which represents the very minimum level of
Working Capital raw materials, process stock, finished goods, receivables, cash etc. which are
in circulation to ensure continuity of production. These represents a fixed
element just like the fixed assets of the company. Such current assets are
basically in the nature of circulating assets but are blocked for long term e.g.
funds invested in core inventories etc. Determination of hard core working
capital in different industries would require a careful analysis of the items of
inventory, receivables, work-in-progress and cash.

Working Capital Management 261

 PRACTICAL QUESTIONS
1. A firm has the following data for the year ending 31st March, 2022:
Sales (1,00,000 @ `20) `20,00,000
Earnings before interest and taxes `2,00,000
Fixed Assets `5,00,000
The three possible current assets holdings of the firm are `5,00,000, `4,00,000 and `3,00,000.
It is assumed that fixed assets level is constant and profits do not vary with current assets level.
Analyse the effect of the three alternative current assets policies.
[Sol. ROTA = 20%; 22.22%; 25%; CA to FA Ratio = 1; 0.80; 0.60]
2. A company is considering its working capital investment and financial policies for the next
year. Estimated fixed assets and current liabilities for the next year are `2.60 crore and `2.34
crore respectively. Estimated sales and EBIT depend on current assets investment, particularly
inventories and book-debts. The financial controller of the company is examining the following
alternative working capital investment policies. [RTP May 2019]
(`Crores)
Working capital policy Investment in Current Assets Estimated Sales EBIT
Conservative 4.5 12.3 1.23
Moderate 3.9 11.5 1.15
Aggressive 2.6 10.0 1.00
After evaluating the working capital investment policy, the Financial Controller has advised the
adoption of the moderate working capital policy. The company is now examining the use of long-
term borrowings for financing its assets. The company will use `2.50 crores of the equity funds.
The corporate tax rate is 35%. The company is considering the following debt alternatives:
(`Crores)
Finance Policy Short-term debt Long-term debt
Conservative 0.54 1.12
Moderate 1 0.66
Aggressive 1.5 0.16
Interest rate average 12% 16%
You are required to calculate the following:
(1) Working capital investment for each policy;
(a) Net working capital positions;
(b) Rate of return before interest & tax on total assets;
(c) Current ratio
(2) Financing for each policy;
(a) Net working capital position; (b) Rate of return on shareholders’ equity;
(c) current ratio
[Sol. (1)(a) `2.16 crores; `1.56 crores; `0.26 crores; (b) 17.32%; 17.69%; 19.23%; (c) 1.92; 1.67; 1.11;
(2)(a) `1.02 crores; `0.56 crores; `0.06 crores; (b) 23.56%; 24.03%; 24.55%; (c) 1.35; 1.11; 1.02]
262 Financial Management PW
 3. On 1st January, the Managing Director of SK Ltd. wishes to know the amount of working capital
that will be required during the year. From the following information prepare the working capital
requirements forecast.
Production during the previous year was 60,000 units. It is planned that this level of activity
would be maintained during the present year.
The expected ratios of the cost to selling prices are raw material 60%, direct wages 10%
and overheads 20%.
Raw materials are expected to remain in store for an average of 2 months before issued to
production.
Each unit is expected to be in process for one month, the raw materials being fed into the
pipeline immediately and the labour and overhead cost accruing evenly during the month.
Finished goods will stay in the warehouse awaiting dispatch to customers for approximately
3 months.
Credit allowed by creditors is 2 months from the date of delivery of raw materials.
Credit allowed to debtors is 3 months from the date of dispatch.
Selling price is `5 per unit.
There is a regular production and sales cycle.
Wages and overheads are paid on the 1st of each month for the previous month.
The company normally keeps cash in hand to the extent of `20,000.
[Sol. `1,66,250]
4. The following annual figures relate to SK Ltd.:
(`)
Sales (at two month’s credit) 36,00,000
Material consumed (suppliers extend two months’ credit) 9,00,000
Wages paid (1 month lag in payment) 7,20,000
Cash manufacturing expenses (expenses are paid one month in arrear) 9,60,000
Administrative expenses (1 month lag in payment) 2,40,000
Sales promotion expenses (paid quarterly in advance) 1,20,000
The company sells its products on gross profit of 25%. Depreciation is considered as a part of
the cost of production. It keeps one months’ stock of raw materials and finished goods and a cash
balance of `1,00,000. Assuming a 20% safety margin, compute the working capital requirements
of the company on cash cost basis. Ignore work-in-process.
[Sol. `7,20,000]
5. A Performa cost sheet of per unit cost of company provides the following particulars:
Raw material cost 100.00
Direct labour cost 37.50
Overhead cost 75.00
Total cost 212.50
Profit 37.50
Selling price 250.00
The company keeps raw material in stock on an average for one month; work in progress on an
average for one week and finished goods in stock on an average for two weeks.

Working Capital Management 263

 The credit allowed by suppliers is three weeks and company allows four weeks credit to its debtors.
The lag in payment of wages is one week and lag in payment of overhead expenses is two weeks.
The company sells one-fifth of the output against cash and maintains cash in hand and at bank
put together at `37,500.
Required: Prepare a statement showing estimate of working capital needed to finance an activity
level of 1,30,000 units of production. Assume that production is carried on evenly throughout the
year and wages and overheads accrue similarly, work-in-progress is 80% complete in all respects.
[Sol. `30,06,250]
6. SK Ltd. has an installed capacity of producing 1.25 lakhs tons of cement per annum; its present
capacity utilization is 80%. The major raw material to manufacture cement is limestone which
is obtained on cash basis from a company located near the plant. The company produces cement
in 200 kgs drum. From the information given below, determine the net working capital (NWC)
requirement on cash cost basis of the company. For the current year cost structure per drum of
cement (estimated) is as under:
(`)
Gypsum 25
Limestone 15
Coal 30
Packaging Material 10
Direct Labour 50
Factory overheads (including depreciation of `10) 30
Administrative overheads 20
Selling overheads 25
Total Cost 205
Profit Margin 45
Selling Price 250
Add: GST (10% of selling price) 25
Invoice price to customer 275
Additional information:
(a) Desired holding period of material:
Gypsum : 3 months Coal : 2.5 months
Limestone : 1 months Packaging material : 1.5 months
(b) Packaging material is used for packaging finished material at the time of sale.
(c) The product is in process for a period of ½ month (assume full units of materials, namely:-
gypsum, limestone and coal are required in the beginning: other conversion costs are to be
taken at 50%).
(d) Finished goods are in stock for a period of 1 month before they are sold
(e) Debtors are extended credit for a period of 3 months
(f) Average time lag in payment of wages is approximately ½ month and of overheads: 1 month

264 Financial Management PW

 (g) Average time lag in payment of sales tax is 1½ months
(h) The credit period extended by various suppliers are
Gypsum – 2 months coal – 1 month Packaging material – ½ month
(i) Minimum desired cash balance is `25 lakhs. You may state your assumptions, if any.
[Sol. `3,66,66,667]
7. The management of SK Ltd. is planning to expand its business and consults you to prepare an
estimated working capital statement. The records of the company reveal the following annual
information: [SM, RTP Dec 2021]
(`)
Sales – Domestic at one month’s credit 18,00,000
Export at three month’s credit (sale price 10% below domestic price) 8,10,000
Materials used (suppliers extend two months credit) 6,75,000
Lag in payment of wages – ½ month 5,40,000
Lag in payment of manufacturing expenses (cash ) – 1 month 7,65,000
Lag in payment of administration expenses – 1 month 1,80,000
Selling expenses payable quarterly in advance 1,12,500
Income tax payable in four instalments of which one falls in the next finan- 1,68,000
cial year
Rate of gross profit is 20%. Ignore work-in-progress and depreciation. The company keeps one
month’s stock of raw materials and finished goods (each) and believes in keeping `2,50,000
available to it including the overdraft limit of `75,000 not yet utilized by the company.
The management is also of the opinion to make 10% margin for contingencies on computed figure.
You are required to prepare the estimated working capital statement for the next year.
[Sol. `5,48,702]
8. SK Limited is commencing a new project for manufacture of a plastic component. The following
cost information has been ascertained for annual production of 12,000 units which is the full
capacity: [SM, Similar RTP Nov 2019]
Cost per
unit (`)
Materials 40
Direct labour and variable expenses 20
Fixed manufacturing expenses 6
Depreciation 10
Fixed administration expenses 4
80

The selling price per unit is expected to be `96 and the selling expenses `5 per unit, 80% of which
is variable. In the first two years of operations, production and sales are expected to be as follows:
Year Production (no. of units) Sales (no. of units)
1 6,000 5,000
2 9,000 8,500

Working Capital Management 265

 To assess the working capital requirements, the following additional information is available:
(a) Stock of materials 2.25 months average consumption
(b) Work-in-progress Nil
(c) Debtors 1 months average sales
(d) Cash balance `10,000
(e) Creditors for supply of materials 1 months average purchase during the year
(f) Creditors for expenses 1 months average of all expenses during the year
Prepare, for the two years:
(i) A Projected statement of Profit/Loss (Ignoring taxation)
(ii) A Projected statement of working capital requirements
[Sol. (i) –`52,000; `20,000; (ii) `1,52,916; `2,13,125]
9. SK Ltd a company newly commencing business in 2021 has the under mentioned projected Profit
& Loss Statement:
` `
Sales 2,10,000
Cost of goods sold (1,53,000)
Gross profit 57,000
Administrative Expenses 14,000
Selling Expenses 13,000 27,000
Profit before tax 30,000
Provision for taxation (10,000)
Profit after tax 20,000
The cost of goods sold has been arrived at as under:
Material used 84,000
Wages & Manufacturing expenses 62,500
Depreciation 23,500
1,70,000
Less: Stock of finished goods (10% of goods produced not yet sold) (17000)
1,53,000
The figures given above relate only to finished goods not to work-in-progress. Goods equal to 15%
of the year’s production (in terms of physical units) will be in process on the average requiring
full materials but only 40% of the other expenses. The company believes in keeping materials
equal to two months consumption in stock.
All expenses will be paid one month in advance. Suppliers of materials will be extending 1– ½
months credit. Sale will be 20% for cash and the rest at two month’s credit. 70% of the income
tax will be paid in advance in quarterly instalments. The company wished to keep `8,000 in cash.
Prepare an estimate of:
(a) Working Capital (b) Cash cost of working capital
[Sol. (a) `75,293; (b) `68,713]
266 Financial Management PW
 10. SK Ltd. has been operating its manufacturing facilities till 31.3.2022 on a single shift working
with the following cost structure:
Per unit (`)
Cost of materials 6.00
Wages (out of which 40% fixed) 5.00
Overheads (out of which 80% fixed) 5.00
Profit 2.00
Selling price 18.00
Sales during 2021-22 - `4,32,000

As at 31.3.2022 the company held:

Stock of raw materials (at cost) `36,000
Work-in-progress (valued at prime cost) `22,000
Finished goods (valued at total cost) `72,000
Sundry debtors `1,08,000
In view of increased market demand, it is proposed to double production by working an extra
shift. It is expected that a 10% discount will be available from suppliers of raw materials in view
of increased volume of business. Selling price will remain the same. The credit period allowed
to customers will remain unaltered. Credit availed from suppliers will continue to remain at the
present level i.e. 2 months. Lag in payment of wages and expenses will continue to remain half a
month.
You are required to prepare the additional working capital requirements, if the policy to increase
output is implemented.
[Sol. Additional working capital required is `94,800]
11. From the following information of SK Ltd., you are required to calculate:
(a) Net operating cycle period (b) Number of operating cycles in a year

(`)
Raw material inventory consumed during the year 6,00,000
Average stock of raw material 50,000
Work-in-progress inventory 5,00,000
Average work-in-progress inventory 30,000
Cost of goods sold during the year 8,00,000
Average finished goods stock held 40,000
Average collection period from debtors 45 days
Average credit period availed 30 days
No. of days in a year 360 days

[Sol. (a) 84.60 days; (b) 4.26 cycles]

Working Capital Management 267

 12. Following information is forecasted by SK limited for the year ending 31st March, 2022:
Balance as at Balance as at
31st March, 31st March,
2022 (`in lakhs) 2021 (`in lakhs)
Raw Material 65 45
Work-in-progress 51 35
Finished goods 70 60
Receivables 135 112
Payables 71 68
Annual purchases of raw material (all credit) 400
Annual cost of production 450
Annual cost of goods sold 525
Annual operating cost 325
Annual sales (all credit) 585
You may take one year as equal to 365 days.
You are required to calculate:
(a) Net operating cycle period (b) Number of operating cycles in the year
(c) Amount of working capital requirement
[Sol. (a) 147 days; (b) 2.48 cycles; (c) `130.89 lakhs]

13. Following is the balance sheet of SK Ltd. Calculate the amount of maximum permissible bank
finance by all three methods for working capital as per Tandon Committee norms. You are required
to assume the level of hard core current assets to be `30 lakhs. You are required to calculate the
current ratios under each method. [May 2022]

Balance Sheet of SK Ltd. as on 31st March (`in lakhs)

Liabilities Assets
Equity share of `10 each 200 Fixed assets 500
Retained Earnings 200 Current Assets:
11% Debentures 300 Inventory:
Public Deposits 100 Raw materials 100
Trade Creditors 80 WIP 150
Bills Payable 100 Finished goods 75 325
Debtors 100
Cash/Bank 55
980 980

[Sol. `225 lakhs; `180 lakhs; `157.50 lakhs]

268 Financial Management PW

 14. SK Ltd. has provided you the following information for the year 2021-22:
By working at 60% of its capacity the company was able to generate sales of `72,00,000. Direct
labour cost per unit amounted to `20 per unit. Direct material cost per unit was 40% of the selling
price per unit. Selling price was 3 times the direct labour cost per unit. Profit margin was 25%
on the total cost.
For the year 2022-23, the company makes the following estimates:
Production and sales will increase to 90% of its capacity. Raw material per unit price will remain
unchanged. Direct expenses per unit will increase by 50%. Direct labour per unit will increase
by 10%. Despite the fluctuations in the cost structure, the company wants to maintain the same
profit margin on sales.
Raw materials will be in stock for one month whereas finished goods will remain in stock for two
months. Production cycle is for 2 months. Credit period allowed by suppliers is 2 months. Sales
are made to three zones:

Zone Percentage of saels Mode of credit

A 50% Credit period of 2 months
B 30% Credit period of 3 months
C 20% Cash sales
There are no cash purchases and cash balance will be `1,11,000.
The company plans to apply for a working capital financing from bank for the year 2022-23.
Estimate net working capital of the company receivables to be taken on sales and also compute
the maximum permissible bank finance for the company using 3 criteria of Tandon Committee
Norms. (Assume stock of finished goods to be a core current assets) [RTP May 2023]

[Sol. Net working capital = `42,83,500; MPBF = `32,12,625; `30,27,625; `18,57,625]

PRACTICE QUESTIONS
15. The following data relating to an auto component manufacturing company is available for the
year:
Raw material held in storage 20 days
Receivables’ collection period 30 days
Conversion process period 10 days
(raw material – 100%, other costs – 50% complete)
Finished goods storage period 45 days
Credit period from suppliers 60 days
Advance payment to suppliers 5 days
Total cash operating expenses per annum `800 lakhs

75% of the total cash operating expenses are for raw material. 360 days are assumed in a year.
You are required to calculate:

Working Capital Management 269

 (i) Each item of current assets and current liabilities
(ii) The working capital requirement, If the company wants to maintain a cash balance of `10
lakhs at all times.
[Sol. `133.78 lakhs]
16. PK Ltd., a manufacturing company, provides the following information: [Nov 2020]
(`)
Sales 1,08,00,000
Raw Material Consumed 27,00,000
Labour Paid 21,60,000
Manufacturing Overhead 32,40,000
(Including Depreciation for the year `3,60,000)
Administrative & Selling Overhead 10,80,000
Additional Information:
(a) Receivables are allowed 3 months’ credit.
(b) Raw Material Supplier extends 3 months’ credit.
(c) Lag in payment of Labour is 1 month.
(d) Manufacturing Overhead are paid one month in arrear.
(e) Administrative & Selling Overhead is paid 1 month advance.
(f) Inventory holding period of Raw Material & Finished Goods are of 3 months.
(g) Work-in-progress is Nil.
(h) PK Ltd. sells goods at Cost plus 33-1/3%.
(i) Cash Balance `3,00,000.
(j) Safety Margin 10%.
You are required to compute the Working Capital Requirements of PK Ltd. on Cash Cost basis.
[Sol. `44,21,000]
17. Bita Limited manufactures used in the steel industry. The following information regarding the
company is given for your consideration:
(i) Expected level of production 9,000 units per annum.
(ii) Raw materials are expected to remain in store for an average of two months before issue to
production.
(iii) Work-in-progress (50% complete as to conversion cost) will approximate to ½ month’s
production.
(iv) Finished goods remain in warehouse on av average for one month.
(v) Credit allowed by suppliers is one month.
(vi) Two month’s credit is normally allowed to debtors.
(vii) A minimum cash balance of `67,500 is expected to be maintained
(viii) Cash sales are 75% less than the credit sales.

270 Financial Management PW

 (ix) Safety margin of 20% to cover unforeseen contingencies.
(x) The production pattern is assumed to be even during the year.
(xi) The cost structure for Bita Limited’s product is as follows:
(`)
Raw materials 80 per unit
Direct Labour 20 per unit
Overheads (including depreciation `20) 80 per unit
Total cost 180 per unit
Profit 20 per unit
Selling price 200 per unit
You are required to estimate the working capital requirement of Bita Limited.
[Sol. `5,81,400]
18. While applying for financing of working capital requirements to a commercial bank, SK Ltd.
projected the following information for the next year.
Cost Element Per unit (`) Per unit (`)
Raw Materials
X 30
Y 7
Z 6 43
Direct Labour 25
Manufacturing and administration overheads 20
(excluding depreciation)
Depreciation 10
Selling overheads 15
113
Additional Information:
(a) Raw materials are purchased from different suppliers leading to different period allowed as
follows:
X – 2 months; Y – 1 months; Z – ½ month
(b) Production cycle is of ½ month. Production process requires full unit of X and Y in the
beginning of the production. Z is required only to the extent of half unit in the beginning and
the remaining half unit is needed at a uniform rate during the production process.
(c) X is required to be stored for 2 months and other materials for 1 month.
(d) Finished goods are held for 1 month.
(e) 25% of the total sales is on cash basis and remaining on credit basis. The credit allowed by
debtors is 2 months.
(f) Average time lag in payment of all overheads is 1 months and ½ months for direct labour.
(g) Minimum cash balance of `8,00,000 is to be maintained.

Working Capital Management 271

 Calculate the estimated working capital required by the company on cash cost basis if the budgeted
level of activity is 1,50,000 units for the next year. The company also intends to increase the
estimated working capital requirement by 10% to meet the contingencies. (You may assume that
production carried on evenly throughout the year and direct labour and other overheads accrue
similarly.) [RTP May 2021]
[Sol. `40,42,500]
19. Calculate the amount of working capital required for XYZ Ltd. from the following information:
Elements of Cost Per unit (`)
Raw Material 80.00
Direct Labour 30.00
Overheads 60.00
Total Cost 170.00
Profit 30.00
Sales 200.00
Raw materials are held in stock on an average for one month. Work-in-progress (completion
stage 50%), on an average half a month. Finished goods are in stock on an average for one month.
Credit allowed by suppliers is one month and credit allowed to debtors is two months. Time lag
in payment of wages is 1½ weeks. Time lag in payment of overheads is one month. One fourth of
the sales are made on cash basis. Cash in hand and at bank is expected to be `50,000.
You are required to prepare statement showing the working capital needed to finance a level of
activity of 52,000 units of production. Assume that production is carried on evenly throughout
the year and wages and overhead accrue similarly. For the calculation purpose 4 weeks may be
taken as equivalent to a month and 52 weeks in a year.
[Sol. `16,35,000]
20. Day Ltd. a newly formed company has applied to the Private Bank for the first time for financing
its working capital requirements. The following information are available about the projects for
the current year:
Estimated level of activity Completed Units of Production 31,200 plus unit of
work in progress 12,000
Raw Material Cost `40 per unit
Direct Wages Cost `15 per unit
Overheads `40 per unit (inclusive of depreciation `10 per unit)
Selling price `130 per unit
Raw material in stock Average 30 days consumption
Work in Progress stock Material 100% and Conversion cost 50%
Finished goods stock 24,000 units
Credit allowed by the supplier 30 days
Credit allowed to purchases 60 days
Direct wages (lag in payment) 15 days
Expected cash balance `2,00,000

272 Financial Management PW

 Assume that production is carried on evenly throughout the year (360 days) and wages and
overheads accrue similarly. All sales are on the credit basis. You are required to calculate the Net
Working Capital Requirement on Cash Cost Basis. [May 2018]

[Sol. ]

21. SK Ltd., a newly formed company, has applied to commercial bank for the first time for financing
its working capital requirements. The following information is available about the projections
for the current year:
Estimated level of activity: 1,04,000 completed units of production plus 4,000 units of work in
progress. Based on the above activity, estimated cost per unit is:

Raw material `80 per unit

Direct wages `30 per unit
Overheads (exclusive of depreciation) `60 per unit
Total Cost `170 per unit
Selling price `200 per unit
Raw materials in stock: Average 4 weeks consumption, work—in-progress (assume 50%
completion stage in respect of conversion cost) (materials issued at the start of the processing).
Finished goods in stock 8,000 units
Credit allowed by suppliers Average 4 weeks
Credit allowed to debtors/receivables Average 8 weeks
Lag in payment of wages Average 1.5 weeks
Cash at banks (for smooth operation) `25,000
Assume that production is carried on evenly throughout the year (52 weeks) and wages and
overheads accrue similarly. All sales are on credit basis only. You are required to calculate the net
working capital required. [SM, MTP Nov 2018]
[Sol. `42,52,913]

22. MT Ltd. has been operating its manufacturing facilities till 31.3.2021 on a single shift working
with the following cost structure:

Per unit (`)

Cost of Materials 24
Wages (out of which 60% is variable) 20
Overheads (out of which 20% variable) 20
64
Profit 8
Selling price 72

As at 31.3.2021 with the sales of `17,28,000 the company held:

Working Capital Management 273
 (`)
Stock of raw materials (at cost) 1,44,000
Work-in-progress (valued at prime cost) 88,000
Finished goods (valued at total cost) 2,88,000
Sundry debtors 4,32,000
In view of increased market demand, it is proposed to double production by working an extra
shift. It is expected that a 10% discount will be available from suppliers of raw materials in view
of increased volume of business. Selling price will remain the same. The credit period allowed
to customers will remain unaltered. Credit availed from suppliers will continue to remain at the
present level i.e. 2 months. Lag in payment of wages and overheads will continue to remain at
one month.
You are required to calculate the additional working capital requirements, if the policy to increase
output is implemented to assess the impact of double shift for long term as a matter of production
policy.
[Sol. Additional working capital requirement = `3,63,200]]
23. The following information has been extracted from the books of ABS Limited:
Particulars 1st April, 2017 (`) 31st March, 2018 (`)
Raw material 1,00,000 70,000
Work-in-progress 1,40,000 2,00,000
Finished goods 2,30,000 2,70,000
Other information for the year:
Particulars `
Average receivables 2,10,000
Average payables 3,14,000
Purchases 15,70,000
Wages and overheads 17,50,000
Selling expenses 3,20,000
Sales 42,00,000
All purchases and sales on credit basis. Company is willing to know:
(a) Net operating cycle period
(b) Amount of working capital requirement (assume 360 days in a year)
[Sol. (a) 12 days; (b) `1,19,000]
24. Following information is forecasted by the Puja Limited for the year ending 31st March, 2018:
Balance as at 1st Balance as at 31st
April, 2017 (`) March, 2018 (`)
Raw materials 45,000 65,356
Work-in-progress 35,000 51,300
Finished goods 60,181 70,175

274 Financial Management PW

 Balance as at 1st Balance as at 31st
April, 2017 (`) March, 2018 (`)
Debtors 1,12,123 1,35,000
Creditors 50,079 70,469
Annual purchase of raw material (all credit) 4,00,000
Annual cost of production 7,50,000
Annual cost of goods sold 9,15,000
Annual operating cost 9,50,000
Annual sales (all credit) 11,00,000
You may take one year as equal to 365 days. You are required to calculate:
(a) Net operating cycle period
(b) Number of operating cycles in the year
(c) Amount of working capital requirement
[Sol. (a) 86 days; (b) 4.244; (c) `2,23,845.42]
25. Trading and Profit and Loss Account of Beat Ltd. for the year ended 31st March, 2022 is given
below:
Particulars Amount Particulars Amount
(`) (`)
To opening stock: By Sales (credit) 1,60,00,000
- Raw material 14,40,000 By Closing Stock:
- Work-in-progress 4,80,000 - Raw material 16,00,000
- Finished goods 20,80,000 40,00,000 - Work-in-progress 8,00,000
To Purchases (credit) 88,00,000 - Finished goods 24,00,000 48,00,000
To Wages 24,00,000
To Production exp. 16,00,000
To Gross Profit c/d 40,00,000
2,08,00,000 2,08,00,000
To Administration 14,00,000 By Gross Profit b/d 40,00,000
exp.
To Selling exp. 6,00,000
To Net Profit 20,00,000
40,00,000 40,00,000
The opening and closing payables for raw materials were `16,00,000 and `19,20,000 respectively
whereas the opening and closing balances of receivables were `12,00,000 and `16,00,000
respectively.
You are required to ascertain the working capital requirement by operating cycle method.
[Sol. `42,28,329.81]

Working Capital Management 275

 26. The following information is provided by MNP Ltd. for the year ending 31st March, 2020:

Raw Material Storage Period 45 days

Work-in-Progress conversion period 20 days
Finished Goods storage period 25 days
Debt Collection period 30 days
Creditors’ payment period 60 days
Annual Operating Cost `25,00,000
(Including Depreciation of `2,50,000)
Assume 360 days in a year.
You are required to calculate:

(i)Operating Cycle period

(ii)Number of Operating Cycle in a year
(iii)Amount of working capital required for the company on a cost basis.
(iv) The company is a market leader in its product and it has no competitor in the market. Based
on a market survey it is planning to discontinue sales on credit and deliver products based
on pre-payments in order to reduce its working capital requirement substantially You are
required to compute the reduction in working capital requirement in such a scenario.
[Jan 2021]
[Sol. (i) 60 days; (ii) 6 cycles; (iii) `3,75,000; (iv) `1,87,500]

27. From the following data, calculate the maximum permissible bank finance under the three methods
suggested by the Tandon Committee:

Liabilities `in Lakhs

Creditors 120
Other current liabilities 40
Bank borrowing 250
Total 410

Current Assets `in Lakhs

Raw material 180
Work-in-progress 60
Receivables 100
Other current assets 20
Total current assets 510
The total core current assets (CCA) are `200 lakhs

[Sol. `262.50 lakhs; `222.50 lakhs; `72.50 lakhs]

276 Financial Management PW

 SOLUTIONS
15. Since WIP is 100% complete in terms of material and 50% complete in terms of other cost, the
same has been considered for number of days for WIP inventory i.e. 10 days for material and 5
days for other costs respectively.
Particulars `in lakhs

)" 10 % " 10 % , 33.33

Raw material stock +$ 800 ! 75% ! ' ( $ 800 ! 25% ! 50% ! '
*# 360 & # 360 & .-

)" 10 % " 10 % ,
WIP stock +$ 800 ! 75% ! ' ( $ 800 ! 25% ! 50% ! ' 19.45
*# 360 & # 360 & .-

" 45 %
Finished goods stock holding $800 ! 100.00
# 360 '&

" 30 % 66.67
Receivables collection $800 !
# 360 '&

" 5 % 8.33
Advance to supplier $800 ! 75% !
# 360 '&
" 60 %
Credit period from supplier $800 ! 75% ! 100.00
# 360 '&

Computation of Working Capital

Particulars `in lakhs
Raw material stock 33.33
WIP stock 19.45
Finished goods stock 100.00
Receivables 66.67
Advance to suppliers 8.33
Cash 10.00
Total current assets 237.78
Less: Payables (Creditors) 100.00
Working capital 137.78
16. Statement showing Working Capital Requirements of
Amount (`)
Current Assets
Stock of raw material (27,00,000 × 3/12) 6,75,000
Stock of finished goods (77,40,000 × 3/12) 19,35,000
Debtors (88,20,000 × 3/12) 22,05,000

Working Capital Management 277

 Outstanding Administrative & Selling Overheads (10,80,000 × 1/12) 90,000
Cash balance 3,00,000
Total Current Assets (A) 52,05,000
Current Liabilities
Creditors for raw material (27,00,000 × 3/12) 6,75,000
Outstanding Labour cost (21,60,000 × 1/12) 1,80,000
Outstanding Manufacturing Overheads (28,80,000 × 1/12) 2,40,000
Total Current Liabilities (B) 10,95,000
Net Current Assets (A - B) 41,10,000
Add: 10% safety margin 4,11,000
Working capital requirement 44,21,000

Working Note-1
Statement of Cash Cost
Particulars `
Raw material consumed 27,00,000
Add: Labour 21,60,000
Add: Manufacturing Overheads [32,40,000 – 3,60,000] 28,80,000
GFC/NFC/COGS 77,40,000
Add: Administrative & Selling Overheads 10,80,000
Cash cost of sales 88,20,000

17. Statement showing Working Capital Requirements of

Amount (`)
Current Assets
Stock of raw material (9,000 × 80 × 2/12) 1,20,000
Stock of WIP - Material (9,000 × 80 × 0.5/12) 30,000
Wages (9,000 × 20 × 50% × 0.5/12) 3,750
Overheads (9,000 × 60 × 50% × 0.5/12) 11,250 45,000
Stock of finished goods (9,000 × 160 × 1/12) 1,20,000
Debtors (9,000 × 160 × 80% × 2/12) 1,92,000
Cash balance expected 67,500
Total Current Assets (A) 5,44,500
Current Liabilities
Creditors for raw material (9,000 × 80 × 1/12) 60,000
Total Current Liabilities (B) 60,000
Net Current Assets (A - B) 4,84,500
Add: 20% safety margin 96,900
Working capital requirement 5,81,400
Note: Debtors has been calculated on the basis of cash cost. Alternatively, they can be calculated
on sales basis as well.
278 Financial Management PW
18. Statement showing Working Capital Requirements of
Amount (`)
Current Assets
Stock of raw material X (45,00,000 × 2/12) 7,50,000
Stock of raw material Y (10,50,000 × 1/12) 87,500
Stock of raw material Z (9,00,000 × 1/12) 75,000
Stock of work-in-progress (working note – 2) 4,00,000
Stock of finished goods (1,32,00,000 × 1/12) 11,00,000
Debtors for credit sale (1,54,50,000 × 75% × 2/12) 19,31,250
Cash 8,00,000
Total Current Assets (A) 51,43,750
Current Liabilities
Creditors for raw material X (45,00,000 × 2/12) 7,50,000
Creditors for raw material Y (10,50,000 × 1/12) 87,500
Creditors for raw material Z (9,00,000 × 0.5/12) 37,500
Outstanding direct labour (37,50,000 × 0.5/12) 1,56,250
Outstanding manufacturing & administration overheads (30,00,000 × 1/12) 2,50,000
Outstanding selling overheads (22,50,000 × 1/12) 1,87,500
Total Current Liabilities (B) 14,68,750
Net working capital (A – B) 36,75,000
Add: Provision for Contingencies @ 10% 3,67,500
Working capital requirement 40,42,500
Working Note-1
Statement of Cost
Particulars `
Raw material X (1,50,000 × 30) 45,00,000
Raw material Y (1,50,000 × 7) 10,50,000
Raw material Z (1,50,000 × 6) 9,00,000
Raw material consumed 64,50,000
Add: Direct labour (1,50,000 × 25) 37,50,000
Add: Manufacturing & Administration overheads (1,50,000 × 20) 30,00,000
Cash GFC/NFC/COP/COGS 1,32,00,000
Add: Selling overheads (1,50,000 × 15) 22,50,000
Cash cost of sales 1,54,50,000

Working Capital Management 279

 Working Note-2
Statement of calculation of WIP
Particulars `
Raw material X (45,00,000 × 0.5/12) 1,87,500
Raw material Y (10,50,000 × 0.5/12) 43,750
Raw material Z (9,00,000 × 50% × 0.5/12) 18,750
Raw material usage 2,50,000
Add: Raw material Z (9,00,000 × 50% × 50% × 0.5/12) 9,375
Add: Direct labour (37,50,000 × 50% × 0.5/12) 78,125
Add: Manufacturing & Administration overheads 62,500
(30,00,000 × 50% × 0.5/12)
Work in progress stock 4,00,000

19. Statement showing Working Capital Requirements of

Particulars `
Current Assets:
Raw material stock (52,000 × 80 × 4/52) 3,20,000
WIP stock - Material (52,000 × 80 × 50% × 2/52) 80,000
- Labour (52,000 × 30 × 50% × 2/52) 30,000
- Overheads (52,000 × 60 × 50% × 2/52) 60,000 1,70,000
Finished goods stock (52,000 × 170 × 4/52) 6,80,000
Receivables (52,000 × 170 × ¾ × 8/52) 10,20,000
Cash in hand & bank 50,000
Total Current Assets (A) 22,40,000
Current Liabilities
Payables for material (52,000 × 80 × 4/52) 3,20,000
Outstanding wages (52,000 × 30 ×1.5/52) 45,000
Outstanding overheads (52,000 × 60 × 4/52) 2,40,000
Total Current Liabilities (B) 6,05,000
Net Working Capital (A – B) 16,35,000
20. Statement showing Working Capital Requirements of
Amount (`)
Current Assets
Stock of raw material (17,28,000 × 30/360) 1,44,000
Stock of work-in-progress [12,000 × (40 + 7.50 + 15)] 7,50,000
Stock of finished goods [24,000 × (40 + 15 + 30)] 20,40,000
Debtors for sale (6,12,000 × 60/360) 1,02,000

280 Financial Management PW

 Cash 2,00,000
Total Current Assets (A) 32,36,000
Current Liabilities
Creditors for purchase (18,72,000 × 30/360) 1,56,000
Creditors for wages (5,58,000 × 15/360) 23,250
Total Current Liabilities (B) 1,79,250
Net working capital (A – B) 30,56,750
Working Note-1
Statement of Cost
Particulars (`)
Opening stock of raw material –
Add: Purchases (Bal. fig.) 18,72,000
Less: Closing stock of raw material (17,28,000 × 30/360) (1,44,000)
Raw material consumed [(31,200 × 40) + (12,000 × 40)] 17,28,000
Add: Direct wages [(31,200 × 15) + (12,000 × 15 × 50%)] 5,58,000
Add: Overheads [(31,200 × 30) + (12,000 × 30 × 50%)] 11,16,000
Gross Factory Cost 34,02,000
Less: Closing work in progress [12,000 × (40 + 7.50 + 15)] (7,50,000)
Cost of goods produced 26,52,000
Less: Closing stock of finished goods (26,52,000 × 24,000/31,000) (20,40,000)
Cash cost of sales 6,12,000
21. Statement showing Working Capital Requirements of
Amount (`)
Current Assets
Stock of raw material (86,40,000 × 4/52) 6,64,615
Stock of work-in-progress [4,000 × (80 + 15 + 30)] 5,00,000
Stock of finished goods [8,000 × (80 + 30 + 60)] 13,60,000
Debtors for sale (1,63,20,000 × 8/52) 25,10,769
Cash 25,000
Total Current Assets (A) 50,60,384
Current Liabilities
Creditors for raw material (93,04,615 × 4/52) 7,15,740
Creditors for wages (31,80,000 × 1.5/52) 91,731
Total Current Liabilities (B) 8,07,471
Net working capital (A – B) 42,52,913

Working Capital Management 281

 Working Note-1
Statement of Cost
Particulars `
Opening stock of raw material –
Add: Purchases (Bal. fig.) 93,04,615
Less: Closing stock of raw material (86,40,000 × 4/52) (6,64,615)
Raw material consumed [(1,04,000 × 80) + (4,000 × 80)] 86,40,000
Add: Direct wages [(1,04,000 × 30) + (4,000 × 30 × 50%)] 31,80,000
Add: Overheads [(1,04,000 × 60) + (4,000 × 60 × 50%)] 63,60,000
Gross Factory Cost 1,81,80,000
Less: Closing work in progress [4,000 × (80 + 15 + 30)] (5,00,000)
Cost of goods produced 1,76,80,000
Less: Closing stock of finished goods (1,76,80,000 × 8,000/1,04,000) (13,60,000)
Cash cost of sales 1,63,20,000
17, 28, 000
22. Present sales units = = 24,000 units
72
Sales units after double shift = 24,000 × 2 = 48,000 units
Statement of Cost
24,000 units 48,000 units
Per unit Total Per unit Total
Raw Material 24 5,76,000 21.60 10,36,000
Wages:
Variable 12 2,88,000 12 5,76,000
Fixed 8 1,92,000 4 1,92,000
Overheads:
Variable 4 96,000 4 1,92,000
Fixed 16 3,84,00 8 3,84,000
Total cost 64 15,36,000 49.6 23,80,800
Profit 8 1,92,000 22.4 10,75,200
Sales 72 17,28,000 72 34,56,000
1, 44, 000
Stock of raw material units on 31.3.2021 = = 6,000 units
24
88, 000
Stock of WIP units on 31.3.2021 = = 2,000 units
24 + 20
2, 88, 000
Stock of finished goods units on 31.3.2021 = = 4,500 units
64
282 Financial Management PW
 Statement of Working Capital Requirement
Single shift (24,000 units) Double shift (48,000 units)
Units Rate Amount Units Rate Amount
Raw Material stock 6,000 24 1,44,000 12,000 21.60 2,59,200
WIP stock 2,000 44 88,000 2,000 37.60 75,200
Finished goods stock 4,500 64 2,88,000 9,000 49.60 4,46,400
Sundry Debtors 6,000 64 3,84,000 12,000 49.60 5,95,200
Total Current Assets (A) 9,04,000 13,76,000
Creditors for material 4,000 24 96,000 8,000 21.60 1,72,800
Creditors for wages 2,000 20 40,000 4,000 16 64,000
Creditors for Overheads 2,000 20 40,000 4,000 12 48,000
Total Current Liabilities (B) 1,76,000 2,84,800
Working Capital (A – B) 7,28,000 10,91,200
Additional working capital requirement = `10,91,200 - `7,28,000 = `3,63,200

23.
Particulars `
Opening stock of raw material 1,00,000
Add: Purchase of raw material 15,70,000
Less: Closing stock of raw material (70,000)
Raw material consumed 16,00,000
Direct wages and overheads 17,50,000
Work cost 33,50,000
Add: Opening work-in-progress 1,40,000
Less: Closing work-in-progress (2,00,000)
Cost of production 32,90,000
Add: opening stock of finished goods 2,30,000
Less: closing stock of finished goods (2,70,000)
Cost of goods sold 32,50,000
Add: selling expenses 3,20,000
Cost of sales 35,70,000
Profit (Bal. fig.) 6,30,000
Sales 42,00,000

Average stock of raw material

(a) Raw material storage period = ×360
Annual consumption of materiall

" 1, 00, 000 ! 70, 000 %

$ '
# 2 & ( 360
= = 19.125 days or 19 days
16, 00, 000

Working Capital Management 283

 Average stock of WIP
(b) Work-in-Progress conversion period = ×360
Annual cost of production

" 1, 40, 000 ! 2, 00, 000 %

$ '
= # & ( 360 = 18.60 or 19 days
2
32, 90, 000
Average stock of finished goods
(c) Finished stock storage period = ×36
60
Annual cost of goods sold

" 2, 30, 000 ! 2,70, 000 %

$ '
# 2 & ( 360
= = 27.69 or 28 days
32, 50, 000
Average receivables 2,10, 000
(d) Receivables collection period = ×360 = × 360 = 18 days
Average credit sales 42, 00, 000
Average payables for material 3, 14, 000
(e) Payable payment period = ×360 = × 360 = 72 days
Average credit purchase 15,70, 000
(i) Net Operating Cycle Period = A + B + C + D – E = 19 + 19 + 28 + 18 – 72 = 12 days
360 360
(ii) Number of operating cycles = = = 30 times
Operating cycle period 12
Cost of sales 35,70, 000
Amount of working capital = = = `1,19,000
Number of operating cycles 30
24. Working Notes:
Average Stock of Raw Material
(a) Raw Material Storage Period (R) = ×365
Annual Consumption of Raw Mateerial
` 55,178
= × 3651 = 53 days
`3, 79, 644
45, 000 + 65,356
Average Stock of Raw Material = = 55,178
2
Annual Consumption of Raw Material = Opening Stock + Purchases – Closing Stock
= 45,000 + 4,00,000 – 65,356 = `3,79,644
Average Stock of WIP 43, 150
(b) WIP Conversion Period (W) = × 365 = × 365 = 21 days.
Annual Cost of Production `7 , 50, 000

35, 000 + 51, 300

Average Stock of WIP = 43,150
2
Average Stock of Finished Goods
(c) Finished Stock Storage Period (F) = × 365
Cost of Goods Sold
`65,178
= × 365 = 26 days
`9,15, 000

284 Financial Management PW

 60, 181 + 70, 175
Average Stock = = `65,178
2
Average Debtors `1,23,561.50
(d) Debtors Collection Period (D) = ×365 = × 365 = 41 days.
Annual Credit Sales `11,00,000
1, 12, 123 + 1, 35, 000
Average debtors = = `1,23,561.50
2
Average Creditors 60, 274
(e) Creditors Payment Period (C) = ×365 = × 365 = 55 days.
Annual Net Credit Purchases Rs. 4 , 00, 000
50, 079 + 70, 469
Average Creditors = = 60,274
2
(ii) Operating Cycle Period = R + W + F + D – C = 53 + 21 + 26 + 41 – 55 = 86 days
365 365
(ii) Number of Operating Cycles in the Year = Operating Cycle Period = 86 = 4.244
Annual Operating Cost
Amount of Working Capital Required =
Number of Operating Cycles
` 9, 50, 000
= = `2,23,845.42
4.244
Average stock of raw material (14, 40, 000 + 16, 00, 000)/ 2
25. (1) Raw material period (R) = = 86, 40, 000 / 365
Daily avg. consumption of mateerial
= 64.21 days

(2) Production cost = RM Consumed + Wages + Production exp. + Op. WIP – Cl. WIP

= 86,40,000 + 24,00,000 + 16,00,000 + 4,80,000 – 8,00,000 = `1,23,20,000

Average stock of WIP (4, 80, 000 + 8, 00, 000)/ 2
WIP Conversion period = Daily average production cost =
1, 23, 20, 000 / 365
= 18.96 days
(3) Cost of goods sold = Cost of production + Op. FG – Cl. FG

= 1,23,20,000 + 20,80,000 – 24,00,000 = `1,20,00,000

Average stock of FG (20, 80, 000 + 24, 00, 000)/ 2
Finished goods period = =
Daily average cost of goods sold 1, 20, 00, 000 / 365
= 68.13 days
Average receivables (12, 00, 000 + 16, 00, 000)/ 2
(4) Receivables collection period (D) = Daily average credit sales =
1, 60, 00, 000 / 365
= 31.94 days
Average payables (16, 00, 000 + 19, 20, 000)/ 2
(5) Payables payment period (C) = Daily average credit purchases =
88, 00, 000 / 365
= 73 days

Working Capital Management 285

 (6) Operating cycle days = R + W + F + D – C = 64.21 +18.96 + 68.13 + 31.94 – 73 = 110.24 days
365 365
(7) Number of operating cycles per year = Duration of operating cycle = = 3.311
110.24
(8) Total operating expenses = COGS + Administration exp. + Selling exp.

= 1,20,00,000 + 14,00,000 + 6,00,000 = 1,40,00,000

Total operating expenses 1, 40, 00, 000
(9) Working capital required = Number of operating cycles per yearr = = `42,28.329.81
3.311

26. (i) Statement showing Operating cycle

Raw Material storage Period = 45 days
WIP Conversion Period = 20 days
Finished goods storage period = 25 days
Debt collection period = 30 days
Less: Creditors’ payment period = (60 days)
Operating cycle period = 60 days
360 360
(ii) Number of operating cycles in a year = Operating cycle period = 60 days = 6 cycles

(25, 00, 000 − 2,50, 000)

(iii) Amount of working capital required on cash cost basis = = `3,75,000
6
(iv) New operating cycle period = 60 days – Debt collection period = 60 – 30 = 30 days
360
Number of operating cycles in a year = = 12 cycles
30
(25, 00, 000 − 2,50, 000)
New amount of working capital required on cash cost basis =
12
= `1,87,500
Saving in cash cost of working capital = `3,75,000 - `1,87,500 = `1,87,500
27. The maximum permissible bank finance (MPBF) for the firm, under three methods may be
ascertained as follows:
Method I
MPBF = 0.75(CA – CL) = 0.75(510 – 160) = `262.50 lakhs
Method II
MPBF = (0.75 × CA) – CL = (0.75 × 510) – 160 = `222.50 lakhs
Method III
MPBF = 0.75(CA – CCA) – CL = 0.75(510 – 200) – 160 = `72.50 lakhs

286 Financial Management PW