WORKING CAPITAL MANAGEMENT- 1
Working capital is the amount required for the day-today running of the business. A manufacturing company requires raw material for its manufacturing process. It requires also direct expenses. In addition, it needs other overhead expenses. All these expenses jointly constitute working capital required in a company. By equation it is the CURRENT ASSETS- CURRENT LIABILITIES
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
Current assets to be taken into account for calculating working capital are:
1. Raw material required
2. work-in-progress
3. Finished goods
4. Sundry debtors.
Current liabilities to be taken into account are:
1. Sundry creditors.: Sundry creditors arise when raw materials are purchased on credit. Hence sundry creditors are related to raw material purchase.
Volume of raw material is decided depending upon the volume of production. The availability of raw material is also a factor deciding the purchase. If the raw material is not available easily usually the purchase of raw material will high so as to avoid the production bottleneck. Regular supply of raw material is essential for the smooth flow of production.
Work-in-progress: It is the semi finished goods. The cost of work-in-progress may be calculated at prime cost. Prime cost may be calculated by adding the raw materials with direct expenses.
Eg: work-in-progress: (3 days): Three days raw material requirement plus three days direct expenses will give the work-in-progress
Finished goods: It is that part of goods remain with the firm unsold at any particular period of time..
Sundry debtors: When goods are sold on credit you will have sundry debtors.
Calculating model:
Raw materials(2 weeks) 0.84 lakhs
work-in-progress(3 days); 0.20
Finished goods( 3days) 0.72
Sundry debtors ( 3 days) 0.72
Total current assets: 2.57
Sundry creditors: 1 week) = 0.42
Hence the working capital is 2.57-0.42 = 2.15 lakhs
