Operating Cycle Method

In this way, total operating expenses for a period are divided via the number of operating cycles in the relevant period to compute the cash need for working capital. Thus, the computation of total operating expenses, operating cycle period and number of operating cycles in the year is necessary for estimating the amount of working capital, as given below:

Operating Expenses: These expenses comprise purchase of raw materials, direct labour cost, fuel and power, selling and administrative and distribution expenses for a particular period for that estimates can be acquired from cost records. Depreciation, reject of intangible assets is not involved in these expenses as these are non-cash items. As the same, tax and dividend being appropriation of profits are also not included from these expenses. Capital expenses are also not incorporated in it. Though estimating the amount of these expenses fact as modifies in product mix, introduction of a new discontinuation or product of an old product must be created for the changes occurring in costs and price level due to internal and environmental factors.