Working Capital Forecast

This text provides an illustration of how to prepare a working capital forecast. The information provided includes the production level, cost ratios, and payment terms for a company. The working capital forecast shows that the company will need to maintain a balance of Rs. 50,66,667 in current assets to cover its current liabilities.

Questions

• What are the cost ratios for raw materials, direct wages, and overheads?
• How long do raw materials, work-in-progress, and finished goods remain in inventory?
• How long does it take for creditors to pay the company and for the company to pay its debtors?
• What is the estimated balance of cash that the company will hold?

Answers

• The cost ratios are 40%, 20%, and 20% for raw materials, direct wages, and overheads, respectively.
• Raw materials remain in inventory for 3 months, work-in-progress remains in inventory for 2 months, and finished goods remain in inventory for 3 months.
• Creditors take 4 months to pay the company, and the company takes 3 months to pay its debtors.
• The estimated balance of cash that the company will hold is Rs. 2,00,000.