By :- Group B
Gopal Kumar Agarwal
Sangita Pattnaik
Shipra Kumari
Vikash Kedia
Seema Kumari
“Operating Cycle is a time duration required converted raw materials into sale”
The Length of the operating cycle of a manufacturing firm is the sum of :• Inventory Conversion Period• Debtors Conversion Period• Creditors deferral Period
Debtors
Cash
Raw MaterialWIP
Finished Goods
Sales
Raw Material Conversion Period = Raw Material Inventory
Raw Material Consumption Per Day
Working Progress Conversion Period = Work In Process Inventory
Cost Of Production Per Day
Finished Goods Conversion Period = Finished Goods Inventory
Cost Of Goods Sold
Debtors Conversion Period = Debtors
Credit Sale Per Day
Gross Operating Cycle = Inventory Conversion Period
+ Debtors Conversion Period
Operating Cycle = Gross Operating Cycle + Net Operating Cycle
Net Operating Cycle = Inventory Conversion Period +
Debtors Conversion Period + Creditors deferral Period
Creditors deferral Period = CreditorsCredit Purchase Per
Day
Net Operating Cycle = Operating Cycle – Creditors deferral period
“Working Capital is a life-blood & controlling nerve centre of a Business”. No Business can be successfully run without an adequate amount of Working Capital.
Methods of Estimating Working Capital Requirements :-• Percentage Sales Method• Regression Analysis Method• Cash Forecasting Method• Operating Cycle Method• Projected Balance Sheet Method
1. Percentage of Sales Method : This method of estimating Working
Capital is based on the assumptions that the level of
the working capital of the firm is directly related to the
sales value.
2. Regression Analysis Method : This method is based upon the
statistical technique of estimating or predicting the
unknown value of a dependent variable of a dependent
variable from the known value of an independent variable.
3. Cash Forecasting Method : This method of estimating Working
Capital requirements involves forecasting of cash receipts
& disbursements during a future period of time.
It is similar to the preparation of the Cash Budget.
4. Operating Cycle Method : This method is based upon the
operating cycle concept of working capital.
WC= Cost Of Goods Sold * Operating Cycle(days) + Desired Cash Balance
365 or 360 days
5. Projected B/S Method : Under this method, Projected balance sheet
for future date is prepared by forecasting of assets &
liabilities by following any of the methods stated above.
• Issue Of Shares• Issue Of Debentures• Retained Profits• Sales Of Fixed Assets• Terms Loans
Long Term Sources
Short Term Sources
Internal
External
• Depreciation Funds• Provision for Taxation• Accrued Expenses
• Trade Credit• Credit papers• Bank Credit• Public Deposits
It refers to the credit extended by the suppliers of goods in the normal course of business.
Commercial banks are the most important source of short term capital. The major portion of working capital loans are provided by Commercial Banks.Such as :-• Loans.• Cash Credit.• Overdrafts.• Purchasing & Discounting of Bills.
Commercial Papers represents unsecured promissory notes issued by firms to raise short term funds.
In India Reserve Bank of India introduced commercial paper in the Indian money market.