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Working capital assessment
Working Capital Assessment
Investment of Capital:
Effective financial management is the outcome of proper management
of Investment of Capital/ funds in business.
Fixed Capital:
Funds can be invested for permanent or long-term purposes such as
acquisition of fixed assets, diversification and expansion of business,
renovation modernization of plants & machinery, and research &
development.
Short Term Capital:
Funds are also needed for short term purposes, that is, for current
Operations of the business.
Working Capital Assessment
Definitions of Working Capital:
 Working Capital refers to firm's investment in short term assets Viz. cash,
short term securities, accounts receivable and inventories of raw materials,
work-in-process and finished goods.
 It can also be regarded as that portion of the firm's total capital, which is
employed in short-term operations.
 It refers to all aspects of current assets and current liabilities.
 working capital is the amount by which current assets exceed current
liabilities..
 In simple words, we can, say that working capital is the investment
needed for carrying out day-to-day operations of the business smoothly.
Working Capital Assessment
Concept of Working Capital:
 The term Working Capital is Used as a Gross as well as a Net Concept.
 Gross Working Capital represents the totality of fluctuating funds invested
in all current assets in a business.
 Where as Net Working Capital refers to the excess of current assets over
current liabilities.
Items of Current Assets :
 Cash, bank balances, short term investment in Govt. & other securities.
 Inventories : Raw-materials, work-in-process, finished goods, stores &
spares.
 Account Receivables : Bills receivables, Sundry debtors.
Items of Current Liabilities :
 Accounts Payable : Bills payable, Sundry creditors.
 Short Term Borrowing from Bank : Cash Credit, Overdraft, Loan for one
year term.
 Other current liabilities : Advances from customers, Accrued charges &
expenses, Unpaid dividend, Income-tax payable, Outstanding dues etc.
Types of Working Capital :
Generally, working capital is classified into two categories:
(a) Fixed, Regular or Permanent Working Capital
There is always a certain minimum level of current assets, which is
essential for the firm to carry on its business irrespective of the level of
operations.
Working Capital Assessment
(b) Variable, Fluctuating, Seasonal. Temporary or Special
Working Capital
The extra working capital needed to support the changing business
activities is called the fluctuating (variable, seasonal, temporary or
special) working capital.
Working Capital Assessment
Working Capital Assessment
Factors affecting the Working Capital Requirements:
1. Nature of Industry & Size of Business
2. The Operating Cycle
3. The Manufacturing Cycle
4. Variation in supply of raw materials
5. Production policies
6. Shift in demand for products
7. Competitive conditions
8. Growth and expansion programs
9. Operating efficiency
10. Taxation
11. Dividend Policy
12. Price level changes
Working Capital Assessment
For a Manufacturing Unit
 It will have to arrange for procurement of raw material, payment
of wages to the workers
 For meeting routine expenses
 Stock e.g., raw material, semi-finished (work-in-process) goods
 Finished marketable goods
 Inventory
 Accounts receivable
Even a Fully Equipped Manufacturing Unit is Sure
Collapse Without
a. An adequate supply of raw materials to process
b. Cash to meet the wage bill
c. The capacity to wait for the market for its finished products
d. The ability to grant credit to its customers
The Operating Cycle :
Every on-going business has got its operating cycle. The cycle itself has
different successive phases. Let us assume that initially the business
has some cash and bank balances.
1) It uses a part of these to acquire raw materials.
2) A part is used to meet the various manufacturing costs.
3) The raw materials are converted into stock-in-process which in turn
become finished goods.
4) Finished goods get sold and become Accounts Receivables.
5) On realization, the Accounts Receivable turns into cash.
6) The Cycle will repeat itself as the business goes on
Working Capital Assessment
Figure : Working Capital Cycle for Manufacturing Concern
Working Capital Assessment
The span of the operating cycle covers :
1) Raw Materials (RM) holding period
2) Processing period (WIP)
3) Finished Goods (FG) holding period
4) Credit allowed to customers in days
5) Credit obtained from creditors in days
The Span of the Operating
Cycle Covers
Working Capital Assessment
Different Phases of Operating Cycle and their
lengths of Period:
1. Pre-production phase i.e., the period for which raw materials are held
in stock.
Working Capital Assessment
materials-rawofnconsumptioAnnual
360materials-RawofStock 
2. Production phase i.e., the length of the production cycle.
unitscompletedofproductionofCost
360processinWork 
Working Capital AssessmentDifferent Phases of Operating Cycle and their
lengths of Period:
3. Storage phase i.e., the period for which finished goods are held in stock.
4. Collection phase i.e., the collection period in respect of credit sales
made by the business.
unitscompletedofproductionofCost
360RecivablesAccounts 
UnitsCompletedofProductionofCost
360goodsFinishedofStock 
Bangladesh Bank Guideline for Assessing
Working Capital Requirement
 Prior to 29 December, 1988 there was no sector wise credit norms for
Working Capital
 In 1988, a committee was formed for making recommendations on
sector wise credit norms for Working Capital
 The committee recommended credit norms for Working Capital for the
10 sectors, which was circulated through BRPD circular # 30 of 1988
which was amended by BRPD Circular # 07, dated: July 05, 2000. BB
issued credit norms for the industries.
Working Capital Assessment
Textile Spinning
Industry
01. Capacity Utilization :
a) Existing unit : 5 % above last year’s actual capacity utilization
subject to maximum of 75%
b) New unit: 70% of sanctioned/rated capacity whichever is lower.
02. Inventory :
a) Imported raw materials: 90 days (cost at factory site)
b) Local raw materials: 30 days (cost of factory site)
c) Work-in-process: 3 days (at production cost)
d) Finished goods: 10 days (at production cost)
e) Stores and spares: 90 days (cost of factory site)
03. Receivables : 15 days (at production cost)
o4. Cash in hand : Cash requirement for other day-to day expenditure
(e.g. salary, transportation, postage, utilities, etc.) should be arranged by
the sponsors.
Working Capital Assessment
Format After Working Capital
Eestimate:
Items Tied-up period
Daily Requirement Working capital requirement (Tk.) Raw Materials
a) Imported 90 days 3,000/- 2,70,000/-
b) Local 30 days 600/- 18,000/-
c) Working-in-process 03 days 11,000/- 33,000/-
d) Finished goods 10 days 11,000/- 1,10,000/-
e) Stores & spares 90 days 1,000/- 90,000/-
f) Receivables 15 days 11,000/- 1,65,000/-
g) Cash Lump sum. 1,60,000/-Total Working
Capital Requirement 8,46,000/-Less Margin (say 30%)
2,76,000/-Loanable Amount 5,70,000/-
Working Capital Assessment
Working Capital Assessment
How to Calculate the Working Capital Requirement (WCR) ?
WCR = [Accounts Receivable + Inventory + Prepaid Expenses]
minus
[Accounts Payable + Accruals]
Starworld Group End of Year
Year 1 Year 2 Year 3
Accounts Receivable 232 278 362
Inventory 97 116 151
Prepaid expenses 35 20 55
Total 364 414 568
Accounts Payable 116 139 181
Accruals 36 45 55
Total 152 184 236
WCR (*) + 212 + 230 + 332
(*) As the WCR is positive, that means a Net Requirement of funds.
Starworld Group Year 2 Year 3
Accounts Receivable 46 84
Inventory 19 35
Prepaid expenses -15 35
Total 50 154
Accounts Payable 23 42
Accruals 9 10
Total 32 52
Variation of WCR (*) + 18 + 102
(*) As the variation of WCR is positive, that means a Net
Requirement of funds : 18 in 2000 and 102 in 2001.
Example : Variation of WCR :
Working Capital Assessment
2008 2009
sources uses Sources Uses
Accounts Receivable - 46 - 84
Inventory - 19 - 35
Prepaid expenses 15 - - 35
Accounts Payable 23 - 42 -
Accruals 9 - 10 -
47 65 52 154
Net Requirement of Funds - 18 - 102
Working Capital Assessment
Alternatively:
Financing need = Doc - Dap
Where,
Doc =Duration of operating cycle = Drm + Dwip + Dfg + Dar
Dap =Duration of accounts payable
Drm = Duration of raw materials stock
Dwip=Duration of WIP stock
Dfg =Duration of finished goods stock
Dar=Duration of accounts receivable
Working Capital Assessment
The five most common sources of short-term working capital financing:
1.Equity: If your business is in its first year of operation and has not yet
become profitable, then you might have to rely on equity funds for short-
term working capital needs. These funds might be injected from your own
personal resources or from a family member, a friend or a third-party
investor.
2.Trade creditors: If you have a particularly good relationship
established with your trade creditors, you might be able to solicit their help
in providing short-term working capital. If you have paid on time in the
past, a trade creditor may be willing to extend terms to enable you to meet a
big order. For instance, if you receive a big order that you can fulfill, ship
out and collect in 60 days, you could obtain 60-day terms from your
supplier if 30-day terms are normally given. The trade creditor will want
proof of the order and may want to file a lien on it as security, but if it
enables you to proceed, that should not be a problem.
Working Capital Assessment
3.Factoring: Factoring is another resource for short-term working capital financing.
Once you have filled an order, a factoring company buys your account receivable and
then handles the collection. This type of financing is more expensive than
conventional bank financing but is often used by new businesses.
4.Line of credit: Lines of credit are not often given by banks to new businesses.
However, if your new business is well-capitalized by equity and you have good
collateral, your business might qualify for one. A line of credit allows you to borrow
funds for short-term needs when they arise. The funds are repaid once you collect the
accounts receivable that resulted from the short-term sales peak. Lines of credit
typically are made for one year at a time and are expected to be paid off for 30 to 60
consecutive days sometime during the year to ensure that the funds are used for
short-term needs only.
5.Short-term loan: While your new business may not qualify for a line of credit
from a bank, you might have success in obtaining a one-time short-term loan (less
than a year) to finance your temporary working capital needs. If you have established
a good banking relationship with a banker, he or she might be willing to provide a
short-term note for one order or for a seasonal inventory and/or accounts receivable
buildup.
Working capital assessment

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Working capital assessment

  • 2. Working Capital Assessment Investment of Capital: Effective financial management is the outcome of proper management of Investment of Capital/ funds in business. Fixed Capital: Funds can be invested for permanent or long-term purposes such as acquisition of fixed assets, diversification and expansion of business, renovation modernization of plants & machinery, and research & development. Short Term Capital: Funds are also needed for short term purposes, that is, for current Operations of the business.
  • 3. Working Capital Assessment Definitions of Working Capital:  Working Capital refers to firm's investment in short term assets Viz. cash, short term securities, accounts receivable and inventories of raw materials, work-in-process and finished goods.  It can also be regarded as that portion of the firm's total capital, which is employed in short-term operations.  It refers to all aspects of current assets and current liabilities.  working capital is the amount by which current assets exceed current liabilities..  In simple words, we can, say that working capital is the investment needed for carrying out day-to-day operations of the business smoothly.
  • 4. Working Capital Assessment Concept of Working Capital:  The term Working Capital is Used as a Gross as well as a Net Concept.  Gross Working Capital represents the totality of fluctuating funds invested in all current assets in a business.  Where as Net Working Capital refers to the excess of current assets over current liabilities. Items of Current Assets :  Cash, bank balances, short term investment in Govt. & other securities.  Inventories : Raw-materials, work-in-process, finished goods, stores & spares.  Account Receivables : Bills receivables, Sundry debtors. Items of Current Liabilities :  Accounts Payable : Bills payable, Sundry creditors.  Short Term Borrowing from Bank : Cash Credit, Overdraft, Loan for one year term.  Other current liabilities : Advances from customers, Accrued charges & expenses, Unpaid dividend, Income-tax payable, Outstanding dues etc.
  • 5. Types of Working Capital : Generally, working capital is classified into two categories: (a) Fixed, Regular or Permanent Working Capital There is always a certain minimum level of current assets, which is essential for the firm to carry on its business irrespective of the level of operations. Working Capital Assessment
  • 6. (b) Variable, Fluctuating, Seasonal. Temporary or Special Working Capital The extra working capital needed to support the changing business activities is called the fluctuating (variable, seasonal, temporary or special) working capital. Working Capital Assessment
  • 7. Working Capital Assessment Factors affecting the Working Capital Requirements: 1. Nature of Industry & Size of Business 2. The Operating Cycle 3. The Manufacturing Cycle 4. Variation in supply of raw materials 5. Production policies 6. Shift in demand for products 7. Competitive conditions 8. Growth and expansion programs 9. Operating efficiency 10. Taxation 11. Dividend Policy 12. Price level changes
  • 8. Working Capital Assessment For a Manufacturing Unit  It will have to arrange for procurement of raw material, payment of wages to the workers  For meeting routine expenses  Stock e.g., raw material, semi-finished (work-in-process) goods  Finished marketable goods  Inventory  Accounts receivable Even a Fully Equipped Manufacturing Unit is Sure Collapse Without a. An adequate supply of raw materials to process b. Cash to meet the wage bill c. The capacity to wait for the market for its finished products d. The ability to grant credit to its customers
  • 9. The Operating Cycle : Every on-going business has got its operating cycle. The cycle itself has different successive phases. Let us assume that initially the business has some cash and bank balances. 1) It uses a part of these to acquire raw materials. 2) A part is used to meet the various manufacturing costs. 3) The raw materials are converted into stock-in-process which in turn become finished goods. 4) Finished goods get sold and become Accounts Receivables. 5) On realization, the Accounts Receivable turns into cash. 6) The Cycle will repeat itself as the business goes on Working Capital Assessment
  • 10. Figure : Working Capital Cycle for Manufacturing Concern Working Capital Assessment The span of the operating cycle covers : 1) Raw Materials (RM) holding period 2) Processing period (WIP) 3) Finished Goods (FG) holding period 4) Credit allowed to customers in days 5) Credit obtained from creditors in days
  • 11. The Span of the Operating Cycle Covers Working Capital Assessment
  • 12. Different Phases of Operating Cycle and their lengths of Period: 1. Pre-production phase i.e., the period for which raw materials are held in stock. Working Capital Assessment materials-rawofnconsumptioAnnual 360materials-RawofStock  2. Production phase i.e., the length of the production cycle. unitscompletedofproductionofCost 360processinWork 
  • 13. Working Capital AssessmentDifferent Phases of Operating Cycle and their lengths of Period: 3. Storage phase i.e., the period for which finished goods are held in stock. 4. Collection phase i.e., the collection period in respect of credit sales made by the business. unitscompletedofproductionofCost 360RecivablesAccounts  UnitsCompletedofProductionofCost 360goodsFinishedofStock 
  • 14. Bangladesh Bank Guideline for Assessing Working Capital Requirement  Prior to 29 December, 1988 there was no sector wise credit norms for Working Capital  In 1988, a committee was formed for making recommendations on sector wise credit norms for Working Capital  The committee recommended credit norms for Working Capital for the 10 sectors, which was circulated through BRPD circular # 30 of 1988 which was amended by BRPD Circular # 07, dated: July 05, 2000. BB issued credit norms for the industries. Working Capital Assessment
  • 15. Textile Spinning Industry 01. Capacity Utilization : a) Existing unit : 5 % above last year’s actual capacity utilization subject to maximum of 75% b) New unit: 70% of sanctioned/rated capacity whichever is lower. 02. Inventory : a) Imported raw materials: 90 days (cost at factory site) b) Local raw materials: 30 days (cost of factory site) c) Work-in-process: 3 days (at production cost) d) Finished goods: 10 days (at production cost) e) Stores and spares: 90 days (cost of factory site) 03. Receivables : 15 days (at production cost) o4. Cash in hand : Cash requirement for other day-to day expenditure (e.g. salary, transportation, postage, utilities, etc.) should be arranged by the sponsors. Working Capital Assessment
  • 16. Format After Working Capital Eestimate: Items Tied-up period Daily Requirement Working capital requirement (Tk.) Raw Materials a) Imported 90 days 3,000/- 2,70,000/- b) Local 30 days 600/- 18,000/- c) Working-in-process 03 days 11,000/- 33,000/- d) Finished goods 10 days 11,000/- 1,10,000/- e) Stores & spares 90 days 1,000/- 90,000/- f) Receivables 15 days 11,000/- 1,65,000/- g) Cash Lump sum. 1,60,000/-Total Working Capital Requirement 8,46,000/-Less Margin (say 30%) 2,76,000/-Loanable Amount 5,70,000/- Working Capital Assessment
  • 17. Working Capital Assessment How to Calculate the Working Capital Requirement (WCR) ? WCR = [Accounts Receivable + Inventory + Prepaid Expenses] minus [Accounts Payable + Accruals] Starworld Group End of Year Year 1 Year 2 Year 3 Accounts Receivable 232 278 362 Inventory 97 116 151 Prepaid expenses 35 20 55 Total 364 414 568 Accounts Payable 116 139 181 Accruals 36 45 55 Total 152 184 236 WCR (*) + 212 + 230 + 332 (*) As the WCR is positive, that means a Net Requirement of funds. Starworld Group Year 2 Year 3 Accounts Receivable 46 84 Inventory 19 35 Prepaid expenses -15 35 Total 50 154 Accounts Payable 23 42 Accruals 9 10 Total 32 52 Variation of WCR (*) + 18 + 102 (*) As the variation of WCR is positive, that means a Net Requirement of funds : 18 in 2000 and 102 in 2001. Example : Variation of WCR :
  • 18. Working Capital Assessment 2008 2009 sources uses Sources Uses Accounts Receivable - 46 - 84 Inventory - 19 - 35 Prepaid expenses 15 - - 35 Accounts Payable 23 - 42 - Accruals 9 - 10 - 47 65 52 154 Net Requirement of Funds - 18 - 102
  • 19. Working Capital Assessment Alternatively: Financing need = Doc - Dap Where, Doc =Duration of operating cycle = Drm + Dwip + Dfg + Dar Dap =Duration of accounts payable Drm = Duration of raw materials stock Dwip=Duration of WIP stock Dfg =Duration of finished goods stock Dar=Duration of accounts receivable
  • 20. Working Capital Assessment The five most common sources of short-term working capital financing: 1.Equity: If your business is in its first year of operation and has not yet become profitable, then you might have to rely on equity funds for short- term working capital needs. These funds might be injected from your own personal resources or from a family member, a friend or a third-party investor. 2.Trade creditors: If you have a particularly good relationship established with your trade creditors, you might be able to solicit their help in providing short-term working capital. If you have paid on time in the past, a trade creditor may be willing to extend terms to enable you to meet a big order. For instance, if you receive a big order that you can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from your supplier if 30-day terms are normally given. The trade creditor will want proof of the order and may want to file a lien on it as security, but if it enables you to proceed, that should not be a problem.
  • 21. Working Capital Assessment 3.Factoring: Factoring is another resource for short-term working capital financing. Once you have filled an order, a factoring company buys your account receivable and then handles the collection. This type of financing is more expensive than conventional bank financing but is often used by new businesses. 4.Line of credit: Lines of credit are not often given by banks to new businesses. However, if your new business is well-capitalized by equity and you have good collateral, your business might qualify for one. A line of credit allows you to borrow funds for short-term needs when they arise. The funds are repaid once you collect the accounts receivable that resulted from the short-term sales peak. Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for short-term needs only. 5.Short-term loan: While your new business may not qualify for a line of credit from a bank, you might have success in obtaining a one-time short-term loan (less than a year) to finance your temporary working capital needs. If you have established a good banking relationship with a banker, he or she might be willing to provide a short-term note for one order or for a seasonal inventory and/or accounts receivable buildup.