Factors affecting fund requirements, Cost Accounting

Assignment Help:

By the discussions we had previous, it is not tough to come to the conclusion that numerous factors influence the fund or net working capital needs.

Fund needs vary along with the nature and type of business. A firm which provides agency services may need less working capital compared to a firm that carries on business of merchandising. The merchandising firm of course would need to carry several inventory, provide credit and so on. Though, a firm that manufactures products may need more working capital than a retailer. Inventory of raw material, work-in-process and finished goods are carrying by the manufacturing company.

Working capital requirements are directly affected by sales volume. Along with every growth in sales volume we require to carry larger inventory, raised number of customers or receivables as also the operating expenses. This is possible that all the expenses may not move up proportionately. Though, we will have to finance several of these raises. This is also possible that all the expense might not move up proportionately. Conversely, we will have to finance several of these increases. This is also possible  that  the  rise  in  sales  volume  could  be  brought  about  through  granting extended credits. In other words, through investing more funds we raise the volume of sales.

Fund needs for the business may be seasonal. For illustration in industries using agricultural raw materials, this may be more advantageous to procure raw materials throughout harvest season. In case of consumer retailing this may be essential to hold large inventories during festive season. Most of the fund needs are restricted to a restricted period and if we give it on a permanent basis we might have idle funds during most part of the year.

Yet the other important aspect that may condition fund need is the velocity of circulation of current assets. Conversely, the length of the operating cycle will affect the need for funds. Shorter the period of operating cycle faster is the conversion of money invested in current assets in cash and thus lesser the requirements for net working capital.

Net working capital need is also influenced through the terms obtainable from the suppliers. The credit terms extended through the suppliers will determine the amount of additional funds needed.

A firm that carries a month's inventory and grants one month's credit to customers has to fund the inventory cost of two months. If this could avail credit of two months from the suppliers, the requirements for holding inventory and funding receivables is nil.

In the other situation, assume the firm carries a balance of Rs.10, 000 of accounts payable, payable in 30 days and an average accounts receivable balance of Rs. 15,000, receivable in 45 days, the firm will have to maintain a net working capital for the dissimilarity of receipts from customers and payments to creditors given as:

   Rs.

Fund needed to meet payables due in 30 days                                         10,000

 Less:  Funds received from customers-                                                 10,000

Received in 45 days, as Rs.15,000 x 30/45  10,000

 Fund needed in the form of additional net working capital                         Nil    

Suppose that the time taken for collection of receivable is 90 days the circumstances will be as:

Rs.

Fund needed meeting payables due in 30 days.                                                 10,000

Less: Funds received from customers- Rs.15,000 x 30/90                                    5,000

Fund needed in the form of additional net working capital                                    5,000

We could summaries the discussion in respect of the requirement for working capital through saying that the capability of the firm to circulate the "cash → raw material inventory work-in procedure → finished goods inventory → receivables → cash" is the very important and significant factor in formative the amount of working capital. Though the precise amount required to be invested in all these will be determined through the period and quantum of holding of each of these components. It in turn is also influenced through the factors we have discussed in these sections.


Related Discussions:- Factors affecting fund requirements

Variable overhead variance, Variable Overhead Variance This is the dis...

Variable Overhead Variance This is the dissimilarity between the variable overheads absorbed and the actual variable overheads warned. Therefore it can be described as the und

Approach in cost accounting, Approach in Cost Accounting Cost accounti...

Approach in Cost Accounting Cost accounting is based on the framework or concept of cost centers that is all the costs incurred throughout the production process contain to be

Process of setting standards in standard costing, Process of Setting Standa...

Process of Setting Standards in Standard Costing Establishing correct a standard is extremely important due to the accuracy of the standards usually finds out the success of t

Assumptions of break even analysis, ASSUMPTIONS OF BREAK EVEN ANALYSIS ...

ASSUMPTIONS OF BREAK EVEN ANALYSIS 1. Fixed costs for all time remain constant. 2. All costs are divided into fixed and variable costs. 3. Selling price will not alter de

Fixed overhead variance (fov), F ixed Overhead Variance (FOV) Fixed...

F ixed Overhead Variance (FOV) Fixed overhead variance has been described by ICMA, London, as 'the variation between the standard cost of fixed overhead absorbed in the pro

Profit volume ratio, sales to profit volume ratio for three year

sales to profit volume ratio for three year

Find out overhead application rate, Find Out Overhead Application Rate ...

Find Out Overhead Application Rate The given is the budget of Superb Engineering Works for the 2002 year Factory overheads Kshs 62,000

Calculate the cost of capital and units of capital, The owner of the Hughes...

The owner of the Hughes Car Wash believes that the relationship between the number of cars washed and the amount of labor employed is Q = 0.8 + 4.5 L - 0.3 L2 where Q = the num

Visual fit method of cost estimation, Visual Fit Method of Cost Estimation ...

Visual Fit Method of Cost Estimation Cost estimation is based on past data regarding the dependent variable and the cost driver. The previous data on cost levels and the outpu

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd