1.

Inventories: - The average amount of raw material to be kept in stock will depend upon
quality of raw material required for production during a particular period and average time
taken in obtaining fresh delivery. Suitable adjustment may have to be made for incontinency
and seasonal factor. It can be calculated by following formula :
Budget Production × Cost of Raw material × Average inventory holding period
(Units) (Per unit) (Months or days)

12(months) OR 365 (Days)

2. Work-in-progress: - The cost of work-in-progress includes raw material, wages

and other overheads in determining the amount of work-in-progress the time period for
which the goods will be in process, is most important. Work-in-process is normally
equivalent to 50% of total cost of production. Symbolically;

Budget production × Estimated WIP × Average WIP time span

(Units) (Per unit) (Month or days)

12(months) OR 365 (Days)

3. Finished Goods: - The period for whichfinished goods have to remain in the
warehouse before is an important factor determining the amount locked up in finished
goods. It summed up as:
Budget Production × cost of goods produced × finished goods holding period
(Units) (Per unit)(Exclude DEP.) (Months or Days)

12(months) OR 365 (Days)

4. Sundry Debtors: - The amount of fund locked up in sundry debtors will be

computed on the basis of credit sales and time lag in collection payment. It should be
estimated in relation to total cost price as follows:-

Budgeted credit sales × Cost of sales × Average collection period

(Units) Excl. Dep. (Per unit) (Months or Days)
 12(months) OR 365 (Days)

5. Cash or Bank balance: - The amount of money which to be kept as cash in hand
or cash at bank can be estimated on the basis of past experience.

6. Sundry creditors: - The lag in payment of supplier of raw materials, goods etc
and the likely credit purchases made during them to help in estimating the amount of
creditor –

Budgeted creditor × raw mat. Requirement × Credit period allowed

(Units) (Units) (Months or days)

12(months) OR 365 (Days)

7. Outstanding Expenses: - The time lag in payment of wages and other expenses
will help in estimating the amount of outstanding expenses as follow –

Budgeted production × Labor cost × Time lag in paymt. of Exp.

(Units) (Per unit) (Months or Days)

12(months) OR 365 (Days)

TECHNIQUE (2): -Percentage of sale method

This is a traditional and simple method of estimating working capital requirement.

According to this method, on the basis of past experience between sales and working
capital requirement, a ratio can be determined for estimating the working capital
requirement in future.
For Example, if in the past experience shows that working capital has been 30% of sales
and it is sales for the next year would amount to 1, 00,000, the amount of working
capital can be estimated to Rs. 30,000 , the basic criticism of this method is that its
presumes a linear relationship between sales and working capital. This is neither true in all
cases nor the method is universally accepted.

The following table shows how the companies estimate their working capital requirement
by using percentage of the sale method for the year 2014-15: -