WORKING

CAPITAL
MANAGEMENT

Creditors

Cash
Raw
Material
Debtors
WORKING
CAPITAL
CYCLE

Finished
goods

WIP

Factors affecting Working capital

Nature of Business
Manufacturing Process
Production Policies
Competition
Availability of Raw material
Terms of purchase and sale
Rapidity of turnover
Operating Efficiency

Working Capital Requirement

Rs.
Raw material . Months of consumption
Work in process months of cost of
production
Finished Goods months of Cost of
sales
Debtors . Months of cost of goods sold
Less: Creditors
Lag in sales
Working capital requirement

The following information has been submitted by a borrower:

(i) Expected level of production
1,20,000 units
(ii) Raw materials to remain in stock
2 months
(iii) Processing period for each unit of product 1 month
(iv) Finished goods remain in stock on an
average
3 months
(v) Credit allowed to the customers from the
date of despatch
3 months
(vi) Expected rates of cost to selling price:
(a) Raw materials 60%
(b) Direct wages 10%
(c) Overheads 20%
(vii) Selling price per unit Rs. 10
(viii) Expected margin on sale 10%
(ix) Credit availed from suppliers 1 month
(xi) Lag in payment of wages 2 weeks

Rs.

Rs.
1,20,000

Raw material (2 months)

Work-in-process (1 month):
Raw material (1 month)
60,000
Expenses ( month)
15,000 75,000
Finished goods (3 months)
2,70,000
Debtors (3 months)
2,70,000
7,35,000
Less: Creditors
60,000
Lag in wages
5,000
65,000
Working capital required
6,70,000

Sources of Working Capital

Bank finance
Creditors
Advance from customers
Commercial papers
Factoring
Forfaiting