From the following projections of Excel Ltd. for the next year, determine the working capital required by the company: Annual sales Rs. 14,40,000 Cost of production Rs. 10,80,000 Raw material purchases Rs. 7,05,000 Monthly expenditure Rs. 25,000 Estimated opening stock of raw materials Rs. 1,40,000 Estimated closing stock of raw materials Rs. 1,25,000 Inventory norms: Raw materials 2 months Work-in-process ½ month Finished goods 1 month The firm enjoys a credit of half-a-month on its purchases and allows one month credit on its supplies. On sales orders the company receives an advance of Rs. 15,000. Assume that the production is carried out evenly throughout the year and the desired minimum cash balance is Rs. 10,000. Solution: Determination of net working capital: (A) CURRENT ASSETS: Cash balance Inventories: Raw materials: Opening stock Rs. 1,40,000 Add: Purchases 7,05,000 Less Closing stock -1,25,000 Annual consumption Rs. 7,20,000 Two months requirement :
7,20 ,000 ×2 12
10 ,80 ,000 ×1 2 ×12
Amount (Rs.) 10,000
1,20,000
Work-in-process: (yearly cost of production excluding depreciation x ½)
÷
12 =
45,000 90,000 90,000 25,000 3,80,000
Finished goods: 10 ,80 ,000 × Debtors: 10 ,80 ,000 × Monthly Expenditure Total current assets
1 12
1 12
(B) CURRENT LIABILITIES: Trade creditors: 7,05 ,000 × × 29,375 Advanced received from debtors 15,000 Total current liabilities 44,375 (C) NET WORKING CAPITAL = (A-B) 3,35,625
1 2 1 12
doc_989307365.doc
7,20 ,000 ×2 12
10 ,80 ,000 ×1 2 ×12
Amount (Rs.) 10,000
1,20,000
Work-in-process: (yearly cost of production excluding depreciation x ½)
÷
12 =
45,000 90,000 90,000 25,000 3,80,000
Finished goods: 10 ,80 ,000 × Debtors: 10 ,80 ,000 × Monthly Expenditure Total current assets
1 12
1 12
(B) CURRENT LIABILITIES: Trade creditors: 7,05 ,000 × × 29,375 Advanced received from debtors 15,000 Total current liabilities 44,375 (C) NET WORKING CAPITAL = (A-B) 3,35,625
1 2 1 12
doc_989307365.doc