Determining working capital requirements, Cost Accounting

 Understanding the existing capital requirements and how these are financed will assist us in understanding the process of financing of business and the flow of funds inside the business. The first question we should answer is how much working capital is required to start the operation. We could find out the amount of capital required and compare the similar with existing capital to notice whether it is sufficient and whether there is any excess obtainable for future use. Please note which we are not applying precise techniques of cash management or liquidity planning as that is beyond the scope of this section.

We know by Ramsons that operating needs of the business requires one month's cash expenses but payment for creditors to be remained in cash. Such is a minimum of Rs. 30,000 cash on hand is required through Ramsons comprising Rs. 4,000 his withdrawal.

Ramsons have to remain three months sales in inventory. It means that throughout the first month he starts along with three months' sales in the form of inventory. We identify that the sales per month is Rs. 1,50,000 sold at a markup of 25 percent upon sales. Thus, inventory needed to be maintained is three times of 75 % of sales.

It is: 1,50,000 x .75 x 3 = Rs. 3,37,500

Likewise, we know from the information obtainable that every month one-third of the sales are made on cash and 2/3 on credit to be collected in four installments. It means, cash collection throughout the month will be cash sales plus one-fourth of credit sales of the period and one-fourth of three previous months' credit sales. Likewise in the first month we will be actually making one half of the sales for cash and another half of on credit.  So example is:

Total Sales

Cash Sales

Rs. 1,50,000



Rs. 50,000

Credit Sales

First Instalment in Cash

Rs. 1,00,000





Total Cash Collection



Rs. 75,000

Credit period of the sales will be given as:

First month sales upon credit less first instalment is Rs. 75,000. It means:

Rs. 75,000 credit for one month

Rs. 50,000 credit for one month

Rs. 25 000 credit for one month

It is equivalent to Rs. 75,000 sales made for credit of two months. In terms of working capital need, we need one month's financing of the cost of sales regarding to Rs. 1,50,000 sales. It is Rs. 1,12,500 is required for financing this amount.

Hence, we could summaries Ramson's need for funds for financing current asset to begin operations, given as:

3 months' inventory



One month's expenses as cash





Throughout the first month Ramsons will sell one-third of the inventory generating Rs. 75,000 in cash and another half of Rs. 75,000 to be collected into three instalments. Hence we require some additional funds to finance our granting credit for the customers.

Likewise,  we  would  require  to  replenish  the  inventory  and  make  payments  for expenses. We shall examine such along with the assist of the balance sheet and profit and loss account of Ramsons for the starting four months.

Posted Date: 4/9/2013 1:37:44 AM | Location : United States

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