This document discusses different approaches to estimating working capital requirements, which is the difference between current assets and current liabilities. It describes estimating working capital as a percentage of net sales, total assets, or fixed assets based on historical trends. The operating cycle approach estimates working capital needs based on time lags between purchasing inventory and collecting from debtors. Accurately estimating working capital requirements is important for effective planning and management of a business's finances.

1. Working Capital Estimation &
Calculation

2. • The efficiency of the planning and
management is subject to the correct
estimate of the working capital requirement.
Aspect of working capital planning,
management & control.

3. • Irrespective of the planning exercise
made and control mechanism adopted,
the correct estimation of working capital
requirement is the fundamental
necessity of good and efficient working
capital management.

4. Q. In finance, "working capital" means the same
thing as:
A. Total assets.
B. Fixed assets.
C. Current assets.
D. Current assets minus current liabilities.

5. Q. Spontaneous financing includes:
A. accounts receivable.
B. accounts payable.
C. short-term loans.
D. None of these

6. • A firm must estimate in advance as to
how much net working capital will be
required for the smooth operations of
the business. Only than it can bifurcate
the requirement into permanent and
temporary working capital.
Estimation Process

7. • Working Capital as a percentage of Net Sale.
• Working Capital as percentage of Total or Fixed Assets.
• Working Capital based on the Operating Cycle.
Approaches to estimate the working
capital requirements…

8. • To estimate total current assets as a
percentage of net sales.
• To estimate current liabilities as a
percentage net sales.
• The difference between the two above,
is the net working capital as a
percentage of net sales.
Working Capital as a percentage of Net Sales

9. ABC ltd.for past three years, on the basis of which the
working capital requirement for the next year is to be
estimated, given that the sales are expected to increase by
10% over sales level of current year:
Particulars' Year 1 Year 2 Year 3
Net Sales 10,00,000 12,00,000 14,00,000
Total Current Assets 2,00,000 2,52,000 3,00,000
Total Current Liabilities 50,000 60,000 70,000
Current assets as a % of
sales
20% 21% 22%
Current Liabilities as a 5% 5% 5%

10. Solution
• Expected Sales = 14,00,000 + 10% =
15,40,000/-
• Average Current Assets of last 3 yrs.
20%+21%+22%= 21%
3
It means 21% of 15,40,000/- = 3,23,400/-
Current liabilities 5%of 15,40,000/-= 77,000/-
Net working Capital= CA-CL = 2,46,400/-

11. • This approach of estimation of working capital
requirement is based on the fact that total
assets of the firm are consisting of fixed assets
and current assets.
Working Capital as percentage of Total Assets or
Fixed Assets

12. Q. Difference between current assets and
current liabilities is :
A. Gross working capital
B. Net working capital
C. Fixed capital
D. Equity capital

13. • On the basis of past experience, a relationship
between :
i) Total current assets i.e. gross working capital
or net working capital…
ii) Total fixed assets or total assets of the firm ….
….. is established

14. • Which of the following is not used to estimate
the working capital requirement?
A. As percentage of Net Sales
B. As percentage of Fixed Assets
C. As percentage of Profit
D. None of these

15. For example… a firm is maintaining 20% of its total
assets in the form of current assets and expected to
have total assets Rs. 50,00,000/- next year.
…Thus, the current assets of the firm would be
Rs.10,00,000/-

16. • As per firm’s policy there should be 20 % of its
Fixed assets in the form of current assets, if
firm’s fixed assets are Rs. 2,50,000 then
current assets will be
A. 15000
B. 25000
C. 45000
D. 65000

17. In this approach, the working capital may be also
established as % of Fixed Assets. The firm
basically plans the future level of fixed assets in
terms of Capital Budgeting decision.

18. Working capital requirement of a firm
depends upon two variables :
• Time Factor
• Value Factor

19. Source Item Time Factor Value Factor
Raw material Storage Period Value of Raw Material
Work in progress Production Period
(Conversion Period)
Raw Material Consumed +
Labor Cost + Mfg.
Expenses
Finish goods Finish Goods Storage
Period
Raw Material Consumed +
Labor Cost + Mfg.Expenses
+ Administrative expenses
Debtors Credit Period Allowed Raw Material Consumed +
Labor Cost + Mfg.Expenses
+ Administrative expenses
Creditors Deferred Period Allowed Value of Raw Material
Purchased
Labor Cost Lag period in Payment Labor Expenses during the
lag period
Overhead Expenses Lag period in Payment Overhead expenses during
the lag period