Working capital as a percentage of net sales, Financial Management

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Q. Working Capital as a Percentage of Net Sales?

This approach to estimate the working capital requirement is based on the fact that the working capital for any firm is directly related to the sales volume of that firm. So, the working capital requirement is expressed as a percentage of expected sales for a particular period. The working capital estimation is thus, solely dependent on the sales forecast. This approach is based on the assumption that higher the sales level, the greater would be the need for working capital. There are three steps involved in the estimation of working capital:

i) To estimate total current assets as a% of estimated net sates.

ii) To estimate current liabilities as a% of estimated net sales, and

iii) The difference between the two above is the net working capital as a% of net sales.


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