Estimating working capital requirements
Financial Management · Unit III · Topic 10 of 16 · 4 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Layout and valuation rules
| Item | Valued at |
|---|---|
| Raw materials stock | RM cost per unit × units × period |
| Work-in-progress | RM in full; labour and overheads in full, or 50% if the question says conversion accrues evenly |
| Finished goods | Total cost of production (excluding depreciation) |
| Debtors | Total cost of credit sales (cash-cost basis); selling price only if told |
| Cash | As given |
| Creditors | RM purchases × credit period |
| Wages and overheads outstanding | Cost × lag period |
Depreciation is excluded because it involves no cash. State every assumption in a footnote under the statement.
2. Trading concern (January 2026)
Sales 1,00,000 units at Rs. 8 = Rs. 8,00,000; net profit 25% on sales, so cost of sales Rs. 6,00,000. Debtors 8 weeks, creditors 4 weeks, stock 12 weeks, contingency 10%.
| Particulars | Rs. |
|---|---|
| Stock: 6,00,000 × 12/52 | 1,38,462 |
| Debtors (at cost): 6,00,000 × 8/52 | 92,308 |
| Current assets | 2,30,770 |
| Less creditors: 6,00,000 × 4/52 | 46,154 |
| Net working capital | 1,84,616 |
| Add 10% contingency | 18,462 |
| Working capital required | 2,03,078 |
(Exactly Rs. 2,03,076.92; the rupee difference is rounding.) Purchases are taken as equal to cost of sales, stock levels being constant. If debtors are valued at selling price (8,00,000 × 8/52 = Rs. 1,23,077), the answer becomes Rs. 2,36,923; mention this as an alternative.
3. Manufacturing company (February 2025)
Output 1,04,000 units a year = 2,000 units a week. Cost per unit: RM 8, labour 3, overheads 6, total 17; price 20. 75% of sales on credit. Cash Rs. 5,000.
| Particulars | Working | Rs. |
|---|---|---|
| RM stock (4 weeks) | 2,000 × 4 × 8 | 64,000 |
| WIP (2 weeks, full cost) | 2,000 × 2 × 17 | 68,000 |
| Finished goods (4 weeks) | 2,000 × 4 × 17 | 1,36,000 |
| Debtors (8 weeks, 75%) | 1,500 × 8 × 17 | 2,04,000 |
| Cash | 5,000 | |
| Current assets | 4,77,000 | |
| Creditors (4 weeks) | 2,000 × 4 × 8 | 64,000 |
| Wages lag (1½ weeks) | 2,000 × 1.5 × 3 | 9,000 |
| Overheads lag (2 weeks) | 2,000 × 2 × 6 | 24,000 |
| Current liabilities | 97,000 | |
| Working capital required | 3,80,000 |
Assumption: WIP is at full cost, the question being silent on its stage of completion. (At 50% conversion it would be 32,000 + 6,000 + 12,000 = Rs. 50,000 and the answer Rs. 3,62,000.)
4. Cost sheet, 2,40,000 units (August 2024)
Per unit: RM 140, labour 60, overheads 70, total 270, price 300. Four weeks = one month, so a month’s output is 20,000 units and a week’s 5,000. One-quarter is cash sales. Wages and overheads accrue evenly, so WIP carries 50% of conversion cost.
| Particulars | Working | Rs. |
|---|---|---|
| RM stock (1 month) | 20,000 × 140 | 28,00,000 |
| WIP: RM (½ month) | 10,000 × 140 | 14,00,000 |
| WIP: labour 50% | 10,000 × 30 | 3,00,000 |
| WIP: overheads 50% | 10,000 × 35 | 3,50,000 |
| Finished goods (1 month) | 20,000 × 270 | 54,00,000 |
| Debtors (2 months, 3/4) | 15,000 × 2 × 270 | 81,00,000 |
| Cash | 50,000 | |
| Current assets | 1,84,00,000 | |
| Creditors (1 month) | 20,000 × 140 | 28,00,000 |
| Wages lag (1½ weeks) | 7,500 × 60 | 4,50,000 |
| Overheads lag (1 month) | 20,000 × 70 | 14,00,000 |
| Current liabilities | 46,50,000 | |
| Working capital required | 1,37,50,000 |
5. Estimates with contingency (August 2024, alternative)
Current assets: stocks 5,000 + 8,000 = 13,000; inland debtors 3,12,000 × 6/52 = 36,000; export debtors 78,000 × 1.5/52 = 2,250; sundry expenses paid a quarter in advance 8,000 × 3/12 = 2,000. Total Rs. 53,250.
Current liabilities: wages 2,60,000 × 1.5/52 = 7,500; materials 48,000 × 1.5/12 = 6,000; rent 10,000 × 6/12 = 5,000; clerical staff 62,400 × 0.5/12 = 2,600; manager 4,800 × 0.5/12 = 200; miscellaneous 48,000 × 1.5/12 = 6,000. Total Rs. 27,300.
Net 53,250 − 27,300 = 25,950; add 10% contingency 2,595; working capital required Rs. 28,545. The undrawn profit of Rs. 11,000 is a source already available in the business: the amount to be found from outside is 28,545 − 11,000 = Rs. 17,545.
How this is examined
One of these problems is set in every paper as the Unit III 10-mark question. Show the statement in two parts — current assets, current liabilities — with the working beside each line and the assumptions in a footnote. The theory alternative (factors, importance) is in the previous note.
Now try the real questions: Financial Management past question papers.