In financial management, Assessment of working capital requirement is very important because with this, we keep on accurate working capital in business and other part of capital, we can use as investment to grow our assets for making plan of buying fixed assets.
Both low working capital or excess working capital is danger and if there is less or excess working capital in your business, it is the sign, you are uncapable finance manager and you must resign your job today.
Ok, if you want to save your job, learn three main methods of assessment of working capital from me.
1. Sales Turnover Method
As per this method, you must have 20% or more working capital of next year estimated Sales. For example if sale is Rs. 100 next year, you must have Rs. 20 as working capital whole next year.
If you want to assess next one month working capital, you have to calculate next month sale estimate and then it is 20% or more of same sale.
2. Cash budget Method
In this method, we make projected cash flow statement. We estimate all our cash inflows in the month and cash outflow in the month. If cash outflow is more than cash inflow, you must need same working capital for operation.
3. Operating Cycle Method
As per this method, following is the formula for calculating working capital requirment
operating expenses / no. of operating cycles in a year
For example, your 30 days are for production
30 days for sale
30 days for receiving money from customer.
Your one operating cycle is of 90 days
no of cycle in a year 4
Annual operating expenses estimated = 40 lakh
then working capital requirement = 40/4 = 10 lakh for one year
Reference
