Working Capital Forecasting Of A Company Assignment

Assignment Task

Goals & Objectives:-

• Ensuring smooth working capital operating cycle of the business.
• Optimizing the level of working capital and minimize the cost of such funds.
• Ascertaining optimal Return on Current Asset Investment.
• Maximizing productivity and enhancing profits in the employment of working capital.
• Determining the efficacy of working capital strategy.

Assignment Question

The management of XYZEE Ltd. has called for a statement showing the working capital needed to finance a level of 3,00,000 units of output for the year. The cost structure for the company’s product, for the above-mentioned activity level, is detailed below.

Cost Element                                                  Cost per unit (Rs)

Raw Materials                                                        20

Direct Labour                                                           5

Overheads                                                             15

Total Cost                                                               40

Profit                                                                      10

Selling Price                                                           50

• Past trends indicate that raw materials are held in stock on an average for two months.
• Work in progress will approximate to half a month’s production.
• Finished goods remain in a warehouse on an average for a month.
• Suppliers of materials extend a month’s credit.
• Two months’ credit is normally allowed to debtors.
• A minimum cash balance of  $ 25,000 is expected to be maintained.
• The production pattern is assumed to be even during the year.

 Prepare the statement of working capital forecast.

Procedure:-

1. Determine the existing Days Inventory Outstanding (DIO) and forecast the Inventory requirement.
2. Determine the existing Days Sales Outstanding (DSO) and forecast the Receivables.
3. Determine the existing Days Payables Outstanding (DPO) and forecast the Payables.
4. Convert Cash Conversion Cycle or Net Operating Cycle into working capital forecast.

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