CACULATION OF WORKING CAPITAL

Operating Cycle Approach: Working capital cycle is more popularly known as the operating cycle. The operating cycle start with cash-raw material storage period-conversion period-finished good storage period-average collection period-back cash along with profit. The total duration all the segments mentioned is known as gross operating cycle period.

CACULATION OF WORKING CAPITAL

In case the company is placed in an advantageous position of being able to sell its products for cash then the segment of average collection period (debtors) will disappear from the gross operating cycle period and to that extent the total duration of the cycle gets reduced. In case advance payments are to be made for procuring materials, the operating cycle period increases. The purchase of raw materials components etc are usually made on a credit basis, thereby, giving rise to the spontaneous current liability i.e. a/cs payable.

CACULATION OF WORKING CAPITAL

When the average payment period of the company to its supplier is deducted from the gross operating cycle period the resultant period is called net operating cycle period or simply operating cycle period. It is obvious that shorter the duration of operating cycle period, faster will be the transformation of current asset into cash. The operating cycle approach is quite useful both in controlling and forecasting working capital.

CACULATION OF WORKING CAPITAL

The step by step calculation of the different segment of operating cycle is as below: Raw material storage period Annual consumption of raw material, component etc. Average daily consumption of raw materials, components etc assuming an year of 360 days for convenience. Average stock of raw materials, components etc.=O/S + Closing stock/2 Raw material storage period =3/2 = n1 days.

CACULATION OF WORKING CAPITAL

Conversion Period: Annual cost of production= Opening stock of W-I-P + consumption of RM + other manufacturing costs such as wage and salaries, power and fuel etc + Depreciation- Closing work in progress. Average daily cost of production= 1/360 Average stock of work-in-progress =Opening W.I.P + Closing W.I.P/2 Average conversion period= 3/2 = n2

CACULATION OF WORKING CAPITAL

Finished Goods Storage Period: Annual cost of sales= Opening stock of Finished goods + Cost of Production + Excise duty + Selling and distribution costs + General administrative costs + financial costs closing stock of finished goods. Average daily cot of sale= 1/360 Average stock of finished goods= Opening stock + closing stock/2 Finished goods storage period = 3/2= n3 days

CACULATION OF WORKING CAPITAL

Average Collection Period: Average Collection Period: Annual credit sale of the company. Average daily credit sale = 1/360 Average balance of sundry debtors = Opening balance + closing balance/2 Average collection period= 3/2=n4 days

CACULATION OF WORKING CAPITAL

Average Payment Period: Annual credit purchases made by the company Average daily credit purchases= 1/360 Average balance of sundry creditors = Opening balance+ closing balance/2 Average payment period =3/2= n5 days Therefore, the gross operating cycle period is obtained as: = (n1+n2+n3+n4) The net operating cycle period = n1+n2+n3+n4-n5