Working Capital Management^193
The figures given above relate only to the goods that have been finished and not to
work in progress goods equal to 15 per cent of the yearís production (in terms of
physical units) are in progress on an average, requiring full materials but only 40 per
cent of other expenses. The company believes in keeping two months consumption of
material in stock; Desired cash balance, Rs 40,000.
Average time-lag in payment of all expenses is 1 month; suppliers of materials extend
1.5 months credit; sales are 20 per cent cash; rest ate at two months credit; 70 per
cent of the income tax has to be paid in advance in quarterly instalents.
You can make such other assumptions as you deem necessary for estimating working
capital requirements.
Solution
Net Working Capital Estimate of a Company(A) Current assets:
(i) Raw material in stock =: (Rs 8,40,000 ◊ 2/12) Rs 1,40,000
(ii) Work-in-progress:
(a) Raw material (Rs 8,40,000 ◊ 15/100) 1,26,000
(b) Wages and manufacturing expenses
=: (Rs 6,25,000 ◊ 0.4 ◊ 15/100) 37,500
(iii) Stock of finished goods:
[Rs 1,70,000 - Rs 23,500 (0.10 ◊ Rs 2,35,000, depreciation) 1,46,500
(iv) Debtors
(a) Cost of goods sold Rs 15,30,000
Less depreciation (Rs 2,35,000 ◊ 0.9) 2,11,500
13,18,500
(b) Administrative expenses 1,40,000
(c) Selling expenses 1,30,000
Total 15,88,500Credit sales (4/5 of Rs 15,88,500) = Rs 12,70,800
(12,70,800 ◊ 2/12) 2,11,800
(v) Cash required 40,000
Total investment in current assets 7,01,800
(B) Current liabilities:
(i) Average time-lag in payment of expenses:
(a) Wages and manufacturing expenses 6,25,000