Estimation of Working Capital

This article provides an estimation of working capital requirement for a company that produces 18,000 units per year. The estimation is based on the following information:

• Raw material is in stock on an average for 2 months.
• Materials are in process on an average for half-a-month.
• Finished goods are in stock on an average for two months.
• Credit allowed by creditors is two months in respect of raw materials supplied.
• Credit allowed to debtors is three months.
• Lag in payment of wages is half month. Cash on hand and at bank is expected to be Rs. 7,000.
• All activities are evenly spread out during the year.

The estimated working capital requirement for the company is Rs. 2,25,250. The current assets of the company are Rs. 1,21,500 and the current liabilities are Rs. 36,000 + Rs. 2250 = Rs. 36,225. The factors that were considered in estimating the working capital requirement are the average inventory levels, the credit terms given to creditors and debtors, and the lag in payment of wages.