Working Capital Management^187
paid on the 30th, extending credit for 28 days, and so on. Average credit period
approximates to half a month.
Overheads (Other than Depreciation and Amortisation)
Budgeted yearly Overhead cost Average time-lag in
production ◊ per unit ◊ payment of overheads
(in units) (months/days)
12 months/365 days (7)The amount of overheads may be separately calculated for different types of overheads.
In the case of selling overheads, the relevant item would be sales volume instead of
production volume.
The computation of working capital is summarised in following format
Format 7: Determination of Working Capital
(I) Estimation of Current Assets:
Amount
(a) Minimum desired cash and bank balances
(b) Inventories
Raw material
work-in-process
Finished Goods
(c) Debtors
Total Current Liabilities:
(II)Estimation of Current Liabilities:
(a) Creditors**
(b) Wages
(c) Overheads
Total Current Liabilities(III) Net Working Capital (I-II)
Add margin for contingency(IV) Net Working Capital Required
* If payment is received in advance, the Item would be listed in CL.
** If advance payment is to be made to creditors, the item would appear under CA. The
same would be the treatment for advance payment of wages and overheads.Examples
- X & Y Ltd is desirous to purchase a business and has consulted you, and one
point on which you are asked advise them. is the average amount of working
capital which will be required in the first yearís working.
You are given the following estimates and are instructed to add 10 per cent to your
computed figure to allow for contingencies.