CA INTERMEDIATE: COSTING & FM · MANAGEMENT OF WORKING CAPITAL

Estimating working capital requirement

Working capital = Current assets − Current liabilities. Each holding = annual figure × months held ÷ 12.

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Worked examples

Example 1 · level 1

Mehta Polymers: Inventory ₹18,000; Trade receivables ₹5,000; Cash and bank ₹18,000; Trade payables ₹36,000; Outstanding expenses ₹2,000. Find the net working capital.

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CA = 18,000 + 5,000 + 18,000 = ₹41,000.
CL = 36,000 + 2,000 = ₹38,000.
NWC = ₹3,000.

Answer: ₹3,000

Example 2 · level 2

Patel Packaging — annual raw material consumption (= purchases) ₹11,16,000; annual cost of production (= cost of sales) ₹15,84,000. Holdings: raw material 2 months; finished goods 0.5 months of cost of production; receivables 1 month of cost of sales; credit from suppliers 2 months of purchases. Estimate the net working capital required (no safety margin).

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Raw material stock: 2 months of consumption = ₹1,86,000
Finished goods: 0.5 months of cost of production = ₹66,000
Receivables: 1 month of cost of sales = ₹1,32,000
Total current assets = ₹3,84,000.
Less creditors: ₹11,16,000 × 2/12 = ₹1,86,000.
Working capital = ₹1,98,000.

Answer: ₹1,98,000

Example 3 · level 3

Sharma Industries Ltd — annual raw material consumption (= purchases) ₹12,48,000; annual cost of production (= cost of sales) ₹23,04,000. Holdings: raw material 2 months; WIP 1 month of cost of production; finished goods 0.5 months of cost of production; receivables 3 months of cost of sales; credit from suppliers 1 month of purchases. Estimate the net working capital required (no safety margin).

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Raw material stock: 2 months of consumption = ₹2,08,000
Work-in-progress: 1 month of cost of production = ₹1,92,000
Finished goods: 0.5 months of cost of production = ₹96,000
Receivables: 3 months of cost of sales = ₹5,76,000
Total current assets = ₹10,72,000.
Less creditors: ₹12,48,000 × 1/12 = ₹1,04,000.
Working capital = ₹9,68,000.

Answer: ₹9,68,000