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WorkingCapitalEstimationOperatingCycleMethod
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ProfitMaximizationvs.
WealthMaximization
Thefinancial
managementhascomea
longwaybyshifting
Differencebetween
LeaseFinancingVs.
HirePurchaseLease
financeandhirepurchase
aretheoptionsof
financing
CapitalStructureTheory
ModiglianiandMiller
(MM)Modiglianiand
Millerapproachtocapital
theory,devisedinthe
SourcesofFinance
Therearevarioussources
offinancesuchasequity,
debt,
WealthMaximization
Wealthmaximizationisa
modernapproachto
financialmanagement.
Maximization
ProfitMaximizationvs.
WealthMaximization
Differencebetween
LeaseFinancingVs.
HirePurchase
CapitalStructureTheory
ModiglianiandMiller
(MM)Approach
SourcesofFinance
Advantagesand
DisadvantagesofBank
Overdraft
Operating cycle method of working capital estimation is based on the duration of operating cycle.
Longertheperiodofthecycle,biggerwillbetheworkingcapitalrequirements.Operatingcyclemeans
thecycleofrawmaterialtoworkinprogresstofinishedgoodstoaccountspayableandfinallytocash.
Operatingcycletimeisthetimetakenstartingfromrawmaterialpurchasestoitsconversionintocash.
0:09/0:09
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Calculatingthetotalworkingcapitalwillnot
sufficethepurpose.Howthisworking
capitalisformedisalsoimportant.It
meanseachcomponentofworkingcapitalwillhavetobeknown.Forthat,wewouldfirstneedthe
activitylevelofthecompanyunderreview.Letusseehowtocalculateeachitemofworkingcapital
below:
RawMaterial(RM)Stock:TheformulafordeterminingtheRMstockismentionedbelow.RMand
manyothercalculationsarebasedonestimatedproductionunitsandthereforeitshouldbecalculated
withutmostaccuracy.
EstimatedProductionUnits*PerUnitCostofRM*(RMHoldingPeriod/365Days)
WorkInProgress(WIP):IncalculatingtheWIP,specialcarehastobetakenofthepercentageof
laborandoverheads.Thesemayvarydependingonthestageoftheproductandcompletion
percentage.Wehavetakenthepercentageforanexample.
Tags
bankoverdraft bonds
capitalbudgeting
capitalstructure
currentassetscurrent
liabilities Currentratio
debentures
debtdebtors
Debtservicecoverageratio
dividenddiscountmodel
equityequityshares
factoring finance financial
accounting financial
analysisfinancial
leveragefinancial
managementfinancing
mix hirepurchase Internal
RateofReturn Investment
decisions IRR lessor letterof
credit leverage management
accounting Negativeworking
EstimatedProduction*{PerUnitCostofRM(100%)+Labor(50%)+Overheads(50%)}*(WorkIn
ProgressPeriod/365Days)
capital Netpresentvalue
FinishedGoodsStock:InFinishedGoodsworkings,wehavetoknowthecostofproductionwiththe
helpofthepreviousyearcostsheetsorbudgetedcostsheetsofthecompanysproducts.
PaybackPeriod profit
Wealthmaximization
workingcapital
Workingcapital
financingworkingcapital
AccountsReceivables:Thiscalculationis
simpleandwejustneedtoputthe
estimatesandaveragecollectionperiod
right.
AccountsPayables:Thecalculationof
accountspayableissimilarbutthemajor
differenceisofrawmaterialcost.Wetake
finishedgoodssellingpriceinaccounts
receivablecalculationwhereasraw
materialcostincaseofaccountspayable.
financetermloantrade
creditvalueofafirmWACC
EstimatedProduction*PerUnitCostof
GoodsProduced*(FinishedGoods
HoldingPeriod/365Days)
EstimatedProduction*SellingPrice*
(CollectionPeriod/365Days)
netprofitNPV
management
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EstimatedProduction*PerUnitRMCost*(PaymentPeriod/365Days)
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AdvantagesandDisadvantagesofOperatingCycleMethodofWorkingCapitalCalculations
Theadvantageisthatitisadetailedmethodandbasedontheactualeconomicconditionsprevailingin
themarket.Itgivesadetailedunderstandingofthebusinessaswellanditisprecisecomparedtoother
methods.Thedisadvantageisthatitisalengthyprocesstoarriveatacomponentwisecalculationof
workingcapital.Itneedsalotofestimatelikeestimatedproduction,holdingperiodofinventory,
collectionandpaymentperiod,etc.So,itisariskymatter.Thereareprobablechancesofgoingwrong
inestimatingthesedataandthatmayhurtthewholeprocess.Itisadvisabletokeepacushionwhile
estimatingthingsonthedarkerside.
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WorkingCapitalEstimationOperatingCycleMethod|eFinanceManagement
OtherMethodsforEstimatingthe
WorkingCapitalRequirements:
PercentageofSalesMethod
RegressionAnalysisMethod
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