F A C T O R S A N D

E S T I M A T I O N O F
W O R K I N G C A P I T A L
R E Q U I R E M E N T S

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 • Working capital in financial management
refers to the difference between a company's
current assets and current liabilities. It
represents the funds available for the day-to-

What is day operations of a business.

• Current assets include cash, accounts

working receivable, inventory, and other assets that

are expected to be converted into cash within
a year. Current liabilities encompass short-
capital? term obligations such as accounts payable,
short-term debt, and other payables due
within a year.
• The formula for working capital is:
• Working Capital= Current Assets - Current
Liabilities.
• A positive working capital indicates that a
company has enough short-term assets to
cover its short-term liabilities, which is
generally a sign of financial health and
liquidity. Conversely, a negative working
capital suggests that a company may struggle
to meet its short-term obligations with its
current assets.
 Scale Of Production Manufacturing Seasonal
Business Nature
FACTORS DETERMINING WORKING CAPITAL
Operations Policy Process Variations

Working Capital Stock Turnover Growth Rate Of

Credit Policy Business Cycles
Cycle Rate Business

Earning Capacity
Price Level
And Dividend Other Factors.
Changes
Policy
• Business nature:- The working capital requirements of a firm
basically depend upon the nature of its business. Public
utility undertakings like Electricity, Water Supply and
Railways need very limited working capital but Trading and
finance firms require larger working capital.
• Scale of operations:- The working capital requirements can
be directly influenced by the size of its business which maybe
measured in terms of scale of operations.
-> Greater the size of business unit, larger will be the working
capital requirements. However smaller concern may need more
working capital due to high overhead charges, inefficient use of
available resources and other economic disadvantages.
• Production policy:- in certain industries the demand is
subjected to wide fluctuations due to seasonal variations. So
high working capital is required to maintain production
during slack periods and maintain inventories for peak
seasons.
• Manufacturing Process:- In manufacturing business, the
requirements of working capital increase in direct proportion
to length of manufacturing process. Longer the process
period of manufacture, larger is the amount of working
capital required.
• Seasonal Variations:- In certain industries raw material is
not available throughout the year. They have to buy raw
materials in bulk during the season to ensure an
uninterrupted flow and process them during the entire year.
• Working Capital Cycle:- In a manufacturing concern,
the working capital cycle starts with the purchase of
raw material and ends with the realization of cash from
the sale of finished products. The speed with which the
working capital completes one cycle determines the
requirements of Working capital longer the period of
the cycle larger is the requirement of working capital.
• Stock Turnover Rate:- There is a high degree of
inverse co relationship between the quantum of
working capital and the velocity or speed with which
the sales are affected. A firm having a high rate of Stock
turnover will need lower amount of working capital as
compared to a firm having a low rate of turnover.
• Credit Policy:- The credit policy of a concern in its
dealings with debtors and creditors influence
considerably the requirements of working capital.
• Business Cycles:- Business cycle refers to alternate
expansion and contraction in general business activity.
When there is a downswing of the cycle, the business
contracts, sales decline, difficulties are faced in
collections from debtors and firms may have a large
amount of working lying idle.
• Growth Rate Of Business:- The working capital
requirements of a concern increase with the growth
and expansion of its business activities.
• Earning Capacity And Dividend Policy:- firms with
high earning capacity may generate cash profits from
operations and contribute to their working capital.
A firm that maintains steady high rate of cash
dividends irrespective of profit generated will need
more working capital.
• Price Level Changes:-Changes in the price level also
affect the working capital requirements. Generally, the
rising prices will require the firm to maintain larger
amount of working capital as more funds will be
required to maintain the same current assets.
• Other Factors:- Certain other factors such as
operating efficiency, management ability,
irregularities of supply, import policy, asset structure,
importance of labour, banking facilities, etc also
influence the requirements of working capital.
 • "Working capital is the life-blood and
controlling nerve centre of a business." No
business can be successfully run without an
adequate amount of working capital. To avoid
the shortage of working capital at once, an
estimate of working capital requirements
should be made in advance so that
arrangements can be made to procure

ESTIMATION OF adequate working capital.

• Methods for estimation of working capital
WORKING CAPITAL requirement:-
1) percentage of sale method
REQUIREMENT 2) regression analysis method (average
relationship between sales and working capital)
3) Cash forecasting method
4) Operating cycle method
5) Projected balance sheet method
1) Percentage of sales method:-
This method of estimating working
capital requirements is based on the
assumption that the level of working
capital for any firm is directly related
to its sales value. If past experience
indicates a stable relationship
between the amount of sales and
working capital, then this basis may
be used to determine the
requirements of working capital for
future period.
For example, if sales for the year 2021
amounted to ₹30 lakhs and working
capital required was ₹6 lakhs, the
requirement of working capital for
the year 2022 on an estimated sales
of ₹40lakhs shall be ₹8 lakhs i.e; 20%
of ₹40 lakhs.
• 2) regression analysis method (average relationship between
sales and working capital):-
• This method of forecasting working capital requirements is based
upon the statistical technique of estimating or predicting the
unknown value of a dependent variable from the known value of an
independent variable. It is the measure of the average relationship
between two or more variables i.e;sales and working capital, in terms
of the original units of the data.
• 3) Cash Forecasting Method:-
• This method of estimating working
capital requirements involves
forecasting of cash receipts and
disbursements during a future period
of time. Cash forecast will include all
possible sources from which cash will
be received and the channels in
which payments are to be made so
the consolidated cash position is
determined.
• This method is similar to the
preparation of a cash budget. The
excess of receipts over payments
represents surplus of cash and the
excess of payment over receipts
causes deficit of cash or the amount
of working capital required.
• 4) Operating cycle method:- This method of estimating working
capital requirements is based upon the operating cycle concept of
working capital. The cycle starts with the purchase of raw material
and other resources and ends with the realization of cash from the
sale of finished goods.
• The speed/time duration required to complete one cycle determines
the requirement working capital - longer the period of cycle, larger is
the requirement of working capital and vice versa.
The requirements of working capital be estimated as follows:
• 5) Projected Balance Sheet Method
• Under this method, projected balance sheet
for future date is prepared by forecasting of
assets and liabilities by following any of the
methods stated above.
• The excess of estimated total current
liabilities, as shown in the projected
balance sheet, is computed to indicate the
estimated amount of working capital
required.
 Total costs incurred on material, wages and overheads

The length of time for which raw materials are to remain in stores before they are issued for production.

The length of the production cycle or work-in-process, i.e., the time taken for conversion of raw material into
finished goods
Factors The length of sales cycle during which finished goods are to be kept waiting for sales.
Requiring
Consideration The average period of credit allowed to customers
While
Estimating The amount of cash required to pay day-t0-day expenses of the business.

Working Capital
The average amount of cash required to make advance payment.

The average credit period expected to be allowed by suppliers. The average amount of cash required to make
advance payments, if any.

Time-lag in the payment of wages and other expenses

The average amount of advances received, if any

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