assesement of working capital requirements
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8/3/2019 Assesement of Working Capital Requirements
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ASSESEMENT OF WORKING
CAPITAL REQUIREMENTS
Iswariya vijayan
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CONTENTS• INTRODUCTION• METHODS OF ESTIMATING WORKINGCAPITAL
1. Percentage of sales method
2. Regression analysis method
3. Cash forecasting method
4. Operating cycle method
5. Projected balance sheet method
• CONCLUSION
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INTRODUCTION
Working capital is the life and controlling
nerve system of a business. No business can besuccessfully run without and adequate amount ofworking capital. To avoid the shortage of workingcapital requirements should be made in advance
so that arrange can be made to procureadequate working capital.
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PERCENTAGE OF SALES METHOD
• This method of estimating working capital requirement is
based on the assumption that the level of working capitalfor any firm is directly related to its sales value.
• If past experience indicate a stable relationship betweenthe amount of sales and working capital then this basismay be used to determine the requirements of workingcapital for future period .
• The individual items of current asset and currentliabilities can also be estimated on the basis of the pastexperience as a percentage of sales.
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CONT………….
Advantages and Disadvantages
• This method is simple to understand andeasy to operate but it cannot be applied in allcases because the direct relationship
between sales and working capital may notbe established.
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REGRESSION ANALYSISMETHOD
It is based on statistical technique of predictingunknown value of a dependent variable withknown value of independent variable .
It is the measure of the average relationshipbetween two or more variable i.e sales andworking capital ,in terms of original units of
data.
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The relationship between sales and working capitalis represented by the equation:
y=a + bx
∑y=na +b ∑x ∑ xy =a ∑x+b ∑x²
Where y=working capital (dependent variable)
a=intercept of the least square
b= Slope of the regression line
x= Sales(Independent variable)
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CASH FORECASTING METHOD• It involves forecasting of cash receipts anddisbursement during a future period of time.
• Cash forecast will include all possible sources fromwhich cash will be received and the channels in
which payments are to be made so that inconsolidated cash position is determined.
• This method is similar to the preparation of cashbudget.
• The excess of receipts over payments representssurplus of cash and the excess of payments overreceipts causes receipt of deficit of cash amount of
woking capital required.
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OPERATING CYCLE METHOD• This method of estimating working capital requirementis based upon the operating cycle concept of working
capital.
• This cycle start with purchase of raw material and otherresources and ends in to the realization of cash in to thesale of finished goods.
• The speed/time duration required to complete onecycle determines the requirement of working capital.
working capital required
= cost of good sold* operating cycle +desired cashbalance
365or 360 days
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CONCLUSION
Working capital is descriptive of that capitalwhich is not fixed. But the more common use
working capital is to consider it as the differencebetween the book value of current asset andcurrent liabilities. To avoid the shortage of workingcapital requirements should be made in advance
so that arrange can be made to procure adequateworking capital.
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THANK YOU