Working Capital Estimation PDF

## Estimation of Working Capital ### Module 1: Introduction and Basic Questions * We will learn to prepare a statement showing estimation of working capital (W/C) to be presented to a Bank for availing a short term bank loan (for financing future Balance Sheet). * In this chapter, we have to...

## Estimation of Working Capital ### Module 1: Introduction and Basic Questions * We will learn to prepare a statement showing estimation of working capital (W/C) to be presented to a Bank for availing a short term bank loan (for financing future Balance Sheet). * In this chapter, we have to study the following 3 concepts: * Cost Structure/Annual Cost * Operating Cycle period * Working Capital #### Cost Structure | Particulars | Amt | | ------------- | ---- | | Rmc/Purchases | XX | | Wages | XX | | Mfg. Overheads | XX | | COP/COGS | XXX | | Admin ONS | XX | | Selling & d. OHS | XX | | COS | XXX | | (+) Profit | XX | | Sales. | XXX | **Notes:** 1. Here, we assume op. RM = closing RM; which is why RMC = Purchases 2. Here, we assume op. FG = closing FG; which is why COP = COGS 3. Here, we assume op. WIP = closing WIP, which is why GFC = NFC (COP) #### Operating Cycle Period The following diagram outlines an Operating Cycle: **Diagram:** A circle containing **"Cash"** with arrows pointing in and out of it. Arrows pointing into the circle are labeled **"RM SP"**, **"WIP HP"**, **"FG SP"**, and **"RCP".** Arrows pointing out of the circle are labeled **"RM SP"**, **"NOCP*"**, and **"(Issued to production)"**. Outside the circle is a rectangle labeled **"WIP"** with an arrow pointing from it to the **"Cash"** circle. The arrow is labeled **"WIP HP"**. On the far left is a rectangle labeled **"RCP"**, and on the far right is a rectangle labeled **"FG"** with an arrow connecting it to the **"(Issued to production)"** arrow. **Key:** RM SP = Raw Material Storage Period WIP HP = Work in Process Holding Period FG SP = Finished Goods Storage Period RCP = Receivable Collection Period NOCP = Net Operating Cycle Period * Average Payment Period (OR) Suppliers Credit Period (SCP) (OR) Creditors Velocity (15d) > * 10 days RM storage period (RM SP) > * 10 days Process Time (OR) WIP Holding Prd (WIP HP) > * 10 days FG Storageprd (FGSP) (OR) Stock velocity > * 10 days Avg.coll'n period (OR) Receivable collection period (RCP) (OR) Debtors velocity > * 40 days Gross Operating Cycle Period (GOCP) #### Net Operating Cycle Period (NOCP) [25 Days] * **Statement Showing Estimation of Working Capital** | Sr.No. | Particulars | Calculation | Amt | Amt | | :------ | :----------- | :----------- | :--- | :--- | | A. | Current Assets | | | | | 1. | RM stock | RMC x RMSP/12 | XX | XX | | 2. | WIP stock | | | | | | => RMC | RMC x 10d% x WIPHP/12 | XX | XX | | | => Wages | Wages x 50% x WIPHP/12 | XX | XX | | | => Mfg.OHS | Mfg.OHS x 50% x WIPHP/12 | XX | XX | | 3. | Finished Goods Stock | COP x FGSP/12 | XX | XX | | 4. | Debtors. | COS x RCP/12 | XX | XX | | 5. | Cash | Given | XX | XX | | 6. | Prep expenses. | Exp. x PP/12 | XX | XX | | | **Total CA/Gross Working Capital** | | | XXX | | B. | (-) Current Liabilities | | | | | 1. | Creditors. | Purchases x SCP/12 | XX | XX | | 2. | o/s expenses. | Expenses x OSP/12 | XX | (xx) | | | **Net Working Capital** | | | XX | | | (+) Safety Margin @% | | | XX | | | **Net Working Capital (incl. safety margin)** | | | XXX | **Additional Notes** 1. If the question asks to calculate working capital on **Cash cost Basis** or does not specify anything about the basis, we have to compulsorily calculate WC on cash cost basis. Meaning Depreciation and Profit won’t be included in our cost structure. 2. However, if the question asks to calculate WC on **Total Basis**, only then we will include Depreciation and Profit in our cost structure. 3. Regarding WIP stock: if nothing is given, then we take RMC 100%, Wages 50%, OHS 50%. 4. Also, if the question mentions the stage of completion is 50%, then we take RMC 100%, Wages 50%, OHS 50% in respect to conversion costs. 5. However, if the question mentions the stage of completion is 50% (without mentioning conversion costs), then: * Stage of completion is 40%. RMC 40%, Wages 40%, OHS 40%. * Stage of completion is 70% in respect of conversion costs. RMC 100%, Wages 70%, OHS 70%. ### Q.3) HW Section pg. 292 **I) Cost Structure** Units = 60,000 FG | Particulars | Amt | | :----------- | :--- | | RMC/Purch | 180,000 | | D. Wages | 30,000 | | Overheads | 60,000 | | COP/COGS/COS | 270,000 | * Sales = 60,000 × ₹5 = 300,000 * RMC = 300,000 × 60% = 180,000 * Wages = 300,000 × 10% = 30,000 * OHS = 300,000 × 20% = 60,000 **II) Operating Cycle Prd.** * Raw materials storage period RMSP 2 months * WIP Holding period WI. PHP 1 month * Finished goods storage period FGSP 3 months * WIP: * labour 1 month * overheads 1 month * Receivables coll' period RCP 3 months * Suppliers credit' period SCP 2 months * o/s wages & overheads 0/s 1 month ### Naureen Itd: Statement Showing Estimation of Working Capital | Particulars | Calculation | Amt | Amt | | :----------- | :----------- | :--- | :--- | | CA: | | | | | RM stock | 180,000 x 2/12 | | 30,000 | | WIP stock: | | | | | RMC | 180,000 x 1/12 | | 15000 | | Wages | 30,000 x 50% x 1/12 | | 1250 | | Overheads | 60,000 x 50% x 1/12 | | 2500 | | | | | 18750 | | Finished goods | 270,000 x 3/12 | | 67500 | | Debtors. | 270,000 x 3/12 | | 67500 | | Cash | Given | | 20,000 | | **Total (A)** | | | 203,750 | | (-) Current liab: | | | | | Creditors | 180,000 × 2/12 | | 30,000 | | - o/s: | | | | | Wages | 30,000 x 1/12 | | 2500 | | Overheads | 60,000 x 1/12 | | 5000 | | | | | 7500 | | **Total (B)** | | | (37500) | | **Net Working Capital** | | | 166,250 | ### Q.1) Pg. 283 **I) Cost Structure For 50,000 Units** | Particulars | Amt | Pu | A | | :----------- | :--- | :--- | :--- | | Raw materials | 2500,000 | 50 | | | Direct materiabour | 10,00000 | 20 | | | Overheads (40-10) | 1500,000 | 30 | | | COP/COGS/COS | 5000,000 | 100 | | | (+) Aofit | १०,००,००० | 2 | | | **Selling price** | ७०,००,००० | | | **II) Operating Cycle Period (360 days)** * RMSP 1 month * SCP 1 month * RCP 2 months * o/s wages 10 days * o/s Exp. 30 days * FGSP 2 months = WIP HP (Process time) 2 months (If not given; do not consider WIP) 60,00,000 Sales * 1500,000 25% cash * 4500,000 75% credit sales ### Estimation of Working Capital | Particulars | Calculation | Amt | | :----------- | :----------- | :--- | | Current Assets | | | | | RMC | (2500,000 x 1/12) | | 208333 | | WIP Rmc | (2500,000 x 2/12) | | 416667 | | Labour | 10,00,000 x 50/ x 2/12 | | 83333 | | Overheads | 15,00,000 × 50/-x2/12) | | 125,000 | | Finished goods | (50,00,000 x 2/12) | | 833,333 | | Debtors. (75% credit) | (5800,000x75x2/12) | | 625000 | | Cash | Given | | 100,000 | | **Total (A)** | | | 2391,666 | | (-) current liabilities | | | | | Creditors | (2500,000 × 1/12) | | 208333 | | - o/s: | | | | | Wages | (10,00,000 × 10/360) | | 2778 | | Expenses | (1000,000 x 30/360) | | 125.000 | | **Total (B)** | | | 361111 | | **Net working capital** | | | 2030555 | ### Q.2) pg. 283 XYZ Co **I) Cost Structure (Annual Cost)** | RMC/Purchases | 900,000 | | :------------- | :-------- | | Wages | 720,000 | | Mfg. Expenses | 960,000 | | COP/COGS | 2580,000 | | + Admin. | 240,000 | | + Selling | 120,000 | | **COS** | 2940,000 | **II) Operating Cycle Period** * Debtors = RCP 2 months * RMSP 1 month * FGSP 1 months * Creditors = SCP 2 months * o/s wages 1 month * o/s mfg. OH 1 month * Admin O/S 1 month * Prepaid quarterly 3 months (3 months) **Note:** * COGS (Incl. Dep) = 3600,000 - 25% (-) 2580,000 * COGS Excl Dep (WNI) = 2,700,000 * Depreciation = 120,000 ### Statement Showing Estimation of Working Capital | Srno | Particulars | Calculation | Amt | Amt | | :--- | :----------- | :----------- | :--- | :--- | | A. | Current Assets: | | | | | 1. | RMC | 900,000 × 1/12 | | 75000 | | 2. | FG Stock | 2580,DDD × 1/12 | | 215000 | | 3. | Debtor | 2940,000 x 2/12 | | 490,000 | | 4. | Prepaid exp. | 120,000 x 3/12 | | 30,000 | | 5. | Cash. | Given | | 100,000 | | | **Total (A)** | | | 910,000 | | B. | (-) current liab | | | | | 1. | Creditors | 900,000 × 2/12 | | 150,000 | | 2. | o/s | | | | | Wages | 720,000 × 1/12 | | 60,000 | | mfg. OHS | 960,000×1/12 | | 80,000 | | Admin OHS | 240,000×1/12 | | 20,000 | | | **Total (B)** | | | (310,000) | | | **Net working cap. (A - B)** | | | 600,000 | | | (+) satety margin @20% | | | 120,000 | | | **Net w/c (including safety margin)** | | | 720,000 | ### Q.11) Pg. 269 Kalyan Itd **I) Cost structure** | Particulars | 2021-22 capacity 60% | 2022-23 capacity 90% | Sr.No. | | :----------- | :------------------------ | :------------------------ | :----- | | D.labour | 220 | 90 % | 1 | | Selling price | 20x3=60 | 120,000 | | | No. of units | 7200,000 | 180,000 | | | | 60 | 60 | | | Raw m. cons. | 120,000.0 | 24 | 2 | | | 20 | 2400,000 | | | Wages | 28,80,000 | (20+10%) 22 | 3 | | | (Bal.fig) 4 | 480,000 | | | Overheads | 4 | (4+50%) 6 | 4 | | | 48 | 5760,000 | | | COP/COGS/COS | 100% | 52 | 5 | | | 1440,000 | 25% | | | (+) Profit 25% | 125% | 2340,000 | | | Sales | 60 7200,000 | 1125% | 6 | **II) Operating cycle Prd:** * RMSP 1 month = Profit (same margin) * FGSP 2 months * WIP HP 2 months * SCP 2 months **Debtors = Sales = RCP.** * 50% 2 months * 30% 3 months * 20% Cash sales ### Statement Showing Estimation of Working Capital Year 2022-23 | Sono | Particulars | Calculation | Amt | Amt | | :--- | :----------- | :----------- | :--- | :--- | | A. | Current Assets: | | | | | 1. | RM stock | (4320,000 x1/12) | | 360,000 | | 2. | WIP stock: | | | | | Rmc | (4320,000x2/12) | | 720,000 | | Wages | (3960,000 × 50/x2/12) | | 330,000 | | overheads | (1080,000 x 50/x3/12) | | 90,000 | | | | | 1140,000 | | 3. | finished g. stock. | (9360,000 × 2/12) | | 1560,000 | | 4. | Debtors- | | | | | Zone A | 117,00,000×50%. x²/12 | | 975000 | | Zone B | 117,00,000×30%×3/12 | | 877500 | | | (Total Sales) | | 1852,500 | | 5. | cash | Given | | 1,11,000 | | | **Total (A)** | | | 5023500 | | B. | less: ciliabilities | | | | | 1. | Creditors | 4320,000X 2/12 | | (720,000) | | | **Net working capital** | | | 43,03,000 | ### Double-shift Working * In this section, we will be provided with a company which was working on a single shift basis but is now expected to work on a double shift basis in the coming year for which we will be asked to estimate working capital. * **Following points are to be considered** * Number of units. produced will get doubled as compared to previous year. * Cost structure will also therefore get doubled as compared to previous year, except fixed cost which will remain fixed only. * Operating cycle period will remain same as previous yr. except WIP HP which will reduce to half. * This is to be followed; unless the question gives separate operating cycle period for the double shift year. ### Q.4) Pg. 284 Cost Structure | Particulars | Single shift p.u. | Single shift Amt | Double shift p.u. | Double shift Amt | | :----------- | :------------- | :------------- | :------------- | :------------- | | RMC/Purchases | 6 | 144000 | 5.4 | 259200 | | wages: | | | | | | variable | 3 | 72000 | 3 | 144000 | | fixed (40%) | 2 | 48000 | 0 | 48000 | | Prime cost | 11 | 264000 | 9.4 | 451200 | | mfg. Ons: | | | | | | variable | 01 | 24000 | 01 | 48000 | | Fixed (80%) | 4 | 96000 | 02 | 96000 | | COP/GOGS/COS | 16 | 384000 | 12.4 | 595200 | | Sales | 18 | 432000 | 18 | 864,000 | ### Operating Cycle Period **I) Single Shift** a. **RMSP** 12 RM stock: 144000 Rmsp = Rm stock 12 144000 X RMSP 36000 12 * Rmsp = 3 months. b. **RCP (Debtors)** Sales X RCP Debtors (at SP) (B5) 12 432000 x RCP 12 108,000 : RCP = 3 months. c. **COS x RCP** 12 (08) 384000 x RCP 12 = Debtors (at CP) 108,000 x 16 18 d. **WIP HP** Prime cost x WIPHP = WIP stock 12 26400D X WIPHP = 22000 12 ・264000×12= ∴∴∴ WIPHP = 1 month- e. **FGSP** COPX FGSP = FG stock 12 384000 x FGSP =72000 12 FGSP = 2.25 months. f. **RCP** = 3 months- g. **Suppliers collection Period (SCP)** = 2 months. h. **o/s wages and OH** = 0.5 month **II) Double-shift.** * **WIP HP** > All periods remains same as single shift, except WIP HP which will reduce to 1 month. > 12 > TX > = 0.5 months. **Additional w/c = 286800 - 192000 = 94800.** ### Module 3: Newly Formed Companies * In this section, we will be provided with a company which is newly formed and therefore its opening Balance sheet data is 0. Since opening RM/WIP/FG is 0 and closing RM/WIP/FG will have same value, we understand that we can now no longer assume that opening RM/WIP/FG = closing RM/WIP/FG. **Following points are to be considered:** 1. **Since, opening Rm ≠ closing RM, we can no longer assume RM consumed = Purchases.** * Purchases = RM consumed - opening RM + closing RM. * Where: * RM consumed -> from cost structure. * opening RM -> 0 * closing RM -> From Estimation of w/c -> RM stock (This point is to be kept in mind while calculating creditors). 2. **Since, opening FG ≠ closing FG, we can no longer assume COP = COGS.** * COGS = COP + opening FG - closing FG. * Where: * Cop -> from cost structure * Opening FG -> 0 * closing FG -> From estimation of WC -> FG stock (This point is to be kept in mind while preparing cost structure). 3. **Since, opening WIP ≠ closing WIP, we can no longer assume prepare the cost structure only for FG units to be produced. We will have to slightly inflate the cost structure to accommodate for the closing WIP stock units (for Revised cost structure, Refer Q.9).** ### Pg. 284 Cost structure (Total Basis) | Particulars | Year 1 Units | Year 1 PU | Year 1 Amt | Year 2 Units | Year 2 PU | Year 2 Amt | | :----------- | :---------- | :-------- | :--------- | :---------- | :-------- | :--------- | | RMC | 6000 | 40 | 240,000 | 9000 | 40 | 360,000 | | Wages | 6000 | 20 | 120,000 | 9000 | 20 | 180,000 | | Fixed: | | | | | | | | Mfg. | 12000 | 6 | 72000 | 12000 | 6 | 72000 | | Depn. | 12000 | 10 | 120,000 | 12000 | 10 | 120,000 | | Admin | 12000 | 4 | 48000 | 12000 | 4 | 48000 | | **Cost of prod** | 6000 | 100 | 600.000 | 9000 | 86.67 | 780,000 | | (+) opening FG | | | (62/6000) | 9000 | (7.8L/9000) | | | **COP of goods available for sale** | **6000** | **100** | **600,000** | **10,000** | **88** | **880,000** | | (+) closing FG | (1000) | 100 | (100,000) | (1500) | 88 | (132,000) | | | | | (0+6000-5000) | 1000+9000-8500 | | | | **COGS** | **5000** | **100** | **500,000** | **8500** | **88** | **748000** | | Selling & dist: | | | | | | | | Variable. | 5000 | 4 | 20,000 | 8500 | 4 | 34000 | | Fixed | 12000 | 1 | 12000 | 12000 | 1 | 12000 | | **Cost of sales** | 5000 | 106.4 | 532,000 | 8500 | 93.41 | 794,000 | | **Sales** | 5000 | 96 | 480,000 | 8500 | 96 | 816,000 | | **Profit/(Loss)** | | | (52000) | | | 22,000 | ### II) Operating cycle period * RmsP 225 m * RCP 1m * SCP 1m * ols exp 1m ### Statement Showing Estimation of w/c. | A. | CA: | Year 1 | Year 2 | | :--- | :--- | :----- | :----- | | 1. | Rm stock | 67500 | 68000 | | 2. | FG Stock | 100,000 | 132000 | | 3. | Debtors | 40,000 | 56250 | | 4. | cash | 10,000 | 10,000 | | | Total (A) | 195000 | 277500 | | B. | (-) Current liab: | | | | 1. | creditors | 23750 | 31,875 | | 2. | o/s expenses | 22,667 | 28,833 | | | All (wages, mfg., Admin, S&D) | 216792 | | | | **Net working c** | **148583** | | ### Q.29) Pg. 287 **WN(1) Cost structure** | Particulars | For FG Production: Calcul | Amt | For closing WIP: calcul | Amt | Total | | :----------- | :--------------------- | :--- | :---------------- | :--- | :---- | | RMC | 104000 x 80 | 8320,000 | 4000×80×100% | 320,000 | 8640,000 | | Wages | 104000×30 | 3120,000 | 4000×30×50/60 | 60,000 | 3180,000 | | Mig:OHS | 104000x60 | 6240,000 | 4000×60×50/120 | 120,000 | 6360,000 | | OP | | 17680,000 | | | | | o.ss. FC | | | | | | | WIP | | | closing WIP | 500,000 | 181,80,000 | | - opening wip | | | | | (500,000) | | c/s WIP | | | | | | | FG/COP | | | | | | | Op. FG | | | | | | | ls FG | | | | | | | COGS/ | | | | | 1360,000 | | COS | | | [8000 units x 2170] | | | | | | | | | 163,20,000 | **WN(2) Operating cycle period (52 weeks)** * RMSP 4 weeks. * SCP 4 weeks * RCP 8 weeks. * 0/s. 1.5 weeks ### Statement showing estimation of w/c. | Srno | Particulars | calculation | Amt | Amt | Q.8) | | :--- | :----------- | :----------- | :--- | :--- | :---- | | A. | Current Assets: | | | | | | 1. | RM stock | (8640,000×4/52) | | 664,615 | c/s RM | | 2. | WIP | (WNI) | | 500,000 | | | 3. | FG | (WNI) | | 1360,000 | | | 4. | Debtors. | 16320,000 × 8/52 | | 2510,769 | WN.2 | | 5. | Cash. | Given | | 25000 | | | | **Total (A)** | | | 5060384 | | | B. | less: current liab | | | | | | 1. | creditors | WN.3 | | 715740 | 1. | | 2. | o/s wages | (3180,000x1.5/52) | | 91,731 | | | | **Total (B)** | | | (807471) | | | | **Net w/C. (A - B)** | | | 4252913 | | **WN.3) creditors (Newly formed co)** > * Purchases = Rmc - opening Rm + c/s Rm > * = 8640,000 - 0