FINANCIAL MANAGEMENT

WORKING CAPITAL PROBLEMS

SUBMITTED BY:NARENDRA KUMAR AMIT KUMAR AGBS NOIDA

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PROBLEM:-1 A firm has applied for working capital finance from a

commercial bank, you are requested by the bank to prepare an estimate of the working capital requirement of the firm. you may add 10% to your estimated figure to account for exigencies.The following is the firms projected profit and loss account:

PARTICULARS 1. SALES 2. COST OF GOOD SOLD 3. GROSS PROFIT (1-2) 4. ADMINISTRATIVE EXPENSES 5.SELLING EXPENSES 6. PROFIT BEFORE TAX [3-(4+5)] 7. TAX PROVISION 8. PROFIT AFTER TAX [6-7]
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RS. 2,247,000 1,637,100 609,900 1,49,800 1,39,100 3,21,000 107,000 214,000

The cost of good sold (cogs) is calculated as follows:-

PARTICULARS
MATERIALS USED WAGES AND OTHER MANUFACTURING EXPENSES DEPRICIATION

RS.
898,800 668,750 251,450 1,819,000

LESS: STOCK OF FINISHED GOODS (10% PRODUCT NOT YET SOLD) COST OF GOOD SOLD 181,900 1,637,100

The figures given above relate only to the goods that have been

finished, and not to work in progress; goods equal to 15 percent of the year production are in progress on an average
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requiring full material but only 40% of other expenses.

The firm has a policy of keeping two months consumption of material in stock. All expenses are paid one month in arrear, supplies of material grant one and a half months credit; sales are 20 percent cash while remaining sold on two months credit. 70 percent of the income tax has to be paid in advance in quarterly installment.
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Sol:-

Estimation of working capital

PARTICULARS RS. A.) INVESTMENT IN INVENTORIES 1. RAW MATERIAL: 2 MONTHS (RMC/12)X2=(8,98,000/12)X2 149,800 2. W.I.P : 15% of cop (adjusted) =COP X 15% =(898,800+40% OF 668,750) X15% = 11,66,300 X 15% 1,74,945 3. FINISHED GOODS : GIVEN 1,81,900 NON CASH DEPRICIATION =181,900 10% OF 251,450 156,755 B.) INVESTMENT IN DEBTORS: 2 MONTHS
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PARTICULARS {credit sales(cost)/12} x 12 =(80% cost of sales/12) x 2 =80% (1,637,100-251,450+149,800 +139,100) 2/12 c.) cash balance d.) investment in current assests e.) current liabilities: deffered payments 1. creditors: 1x1/2 months(purchases/12)x 1x1/2=(898,800/24)x3 2. deffered wages and other manufacturing Selling and admn. Expenses: 1 month
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RS.

223,273 0.00 704,773.33

112,350

PARTICULARS RS. (668,750+149,800+139,100/12) x 1 79,804.17 f.) Total current liabilities 192,154.17 g.) Net working capital (D-F) 512,619.16 NOTES:1. Depriciation is a non-cash item. Therefore it has been ignored in calculations. 2. cost of production does not include selling and administrative expenses. 3. profit has been ignored in calculating net working capital.since taxes can be paid out of profits. They have also been ignored. Alternatively, advance payment taxes require additional working capital and profits.
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PROBLEM 2:- A Performa cost sheet of a company provides

the following data:-

PARTICULARS COST(PER UNIT) RAW MATERIAL DIRECT LABOUR OVERHEADS TOTAL COST(PER UNIT) PROFIT SELLING PRICE

RS. 52.4 19.4 39.0 110.5 19.5 130.0

The following is the additional information available:avg. raw material in stock;one month;avg. material in process;half a month;credit allowed by suppliers;one month;credit allowed to debtors;two months.time log in payment of wages;one and a half weeks;overheads;one month of sales are on cash bases. Cash balance is expected to be rs. 1,20,000 you are required to prepare a statement showing the working capital needed to finance a level of activity of 70,000 units of output.you may assume that production is carried on efficiently throughout the year and wages and overheads accrue similarly.

PARTICULARS RS. A.) Investment in inventory 1.raw material inventory(1 months) (rmc/360)x Rmpl={(70,000x52)/360}x30 303,333.33 2. Work in progress inventory (15 days) (cop/360)x wlpcp={(70,000x110.5)/360}x15 322,291.67 3.Finished goods inventory (1 month) (cos/360)xfcp={(70,000x110.5)x36}x30 644,583.33 1270208.33 B.)Investment in debtors : (60 days) {credit sale(cost)/360}Xbp ={(52,000x110.5)/360}x60 966,875.00 c) Cash balance
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PARTICULARS D.) INVESTMENT IN CURRENT ASSETS(a+b+c) E.) current liabilities:defferd payment 1.creditors:one month(30 days) (purchase of raw material/360)x pdp ={(70,000x52)360}x30 2. Deffered wages:11/2 weeks(10 days) ={(70,000x19.5)/360}x10 3.Deffered overheads (1 months) ={(70,000x39)/360}x30 F.) Total deffered payment {e(1+2+3)} G.) Net working capital (D-F)

RS. 2357,708.3

303,333.33 37,916.67 227,750.00

568,750.00 1,788,958.33

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