Assessment of Working Capital
Working Capital
Working capital is capital, which is needed to complete a whole operating cycle of a business. There
are two concepts of working capital:
Gross Working Capital [Total Current Assets]
Net Working Capital [Total Current Assets Total Current Liabilities]
Need For Working Capital
It is needed for the smooth operation of the firm. Needed volume of working capital depends on the
length of operating cycle. To get cash earlier small length of operating cycle is desired. Length of
operating cycle depends on three factors:
1. Conversion of cash into inventory
2. Conversion of inventory into receivables
3. Conversion of receivables into cash
Determinants of Working Capital
General nature of business
Production cycle
Business cycle
Credit policy
Growth and Expansion
Availability of raw materials
Operating efficiency
Bangladesh Bank Guideline for Assessing Working Capital Requirement
Name of Sub-sector: Textile Spinning Industry
1. Capacity Utilization
a) Existing Unit
: 5% above last years actual
capacity utilization subject to maximum of
90%.
: 50% of sanctioned/rated capacity
whichever is lower.
b) New Unit
2. Inventory
a) Imported Raw materials
b) Local Raw Materials
c) Work-in-process
d) Finished Goods
e) Stores and Spares
:
:
:
:
:
90 days (cost at factory site)
30 days (cost at factory site)
03 days (at production cost)
10 days (at production cost)
90 days (cost at factory site)
3. Receivables
: 15 days (at production cost)
4. Cash in hand
: Cash requirements for other day to
day expenditure (e.g. wages,
transportation, postage, utilities,
etc.) should be arranged by the
sponsors.
5. Format for working capital assessment:
Items
Tied up period
Working capital
Requirements
Raw Materials
a) Imported
b) Local
Work in process
Finished Goods
Stores and Spares
Receivables
Cash
90 days
30 days
03 days
10 days
90 days
15 days
Lump-sum
Note:
1. Margin/security will be as per bank-client relationship.
2. The norms as indicated above including actual capacity utilization for determining working capital
requirements may, however, vary from bank to bank on the basis of actual situation for unit requiring
special dispensation.
Source: Bangladesh Bank, BRPD Circular No.07 dated 5 July, 2000 & BCD Circular No.30 dated 29
December, 1988.
Name of Sub-sector: Electric Goods Industry
01.
Capacity Utilization
a) Existing Unit
: 5% above last years actual
capacity utilization subject to maximum of
90%.
: 50% of sanctioned/rated capacity
whichever is lower.
b) New Unit
02.
Inventory
a) Imported Raw materials
b) Local Raw Materials
c) Work-in-process
d) Finished Goods
e) Stores and Spares
:
:
:
:
:
90 days (cost at factory site)
30 days (cost at factory site)
05 days (at production cost)
15 days (at production cost)
90 days (cost at factory site)
03. Receivables
: 15 days (at production cost)
04. Cash in hand
: Cash requirements for other day to
day expenditure (e.g. wages,
transportation, postage, utilities,
etc.) should be arranged by the
sponsors.
05. Format for working capital assessment:
Items
Tied up period
Working capital
Requirements (Tk.)
Raw Materials
a) Imported
b) Local
Work in process
Finished Goods
Stores and Spares
Receivables
Cash
90 days
30 days
05 days
15 days
90 days
15 days
Lump-sum
Note:
1. Margin/security will be as per bank-client relationship.
2. The norms as indicated above including actual capacity utilization for determining working capital
requirements may, however, vary from Bank to Bank on the basis of actual situation for unit requiring
special dispensation.
Source: Bangladesh Bank, BRPD Circular No.07 dated 5 July, 2000 & BCD Circular No.30 dated 29
December, 1988.
Exercise
M/S General Electric Co. in support of their application for working capital loan from your bank for
Tk.18.00 lac has supplied the following information.
1. Projected annual sales (10,000 fans @ Tk.1,200)
2. Annual cost of Store and Spares
3. Annual Consumption of Raw Materials
Tk.1,20,00,000.00
Tk.72,000.00
Tk.60,00,000.00
(10,000 units @ Tk.600) (imported)
4. Annual Consumption of Raw Materials
(10,000 units @ Tk.100) (local)
Tk10,00,000.00
5. Annual Labor Charges (Tk.20,000 12)
Tk.2,40,000.00
6. Annual Overhead Cost (Tk.5,000 12)
Tk.60,000.00
7. Annual Depreciation
Tk.20,500.00
8. Cash balance-For 2 months Selling & Admn. Exp.
Tk.60,000.00
9. Credit received from the suppliers of local raw materials 10 days.
10. Tied up periods (days): Imported raw materials 90 Local raw materials 30 - Work-in-process
5 finished goods 15 stores & spares 90 and receivables 15.
Solution (Approach 1)
Items
1. Inventory
a. Raw Materials imported
b. Raw Materials - local
c. Work-in-process
d. Finished goods
e. Stores & spares
2. Receivables
3. Cash in hand
Total Working Capital
Less, Sundry Creditors
Working Capital Requirement
Less, Margin (20% on
chargeable current assets and
100% on cash)
Permissible Bank Finance
Tied-up
Period
Working Capital Requirements
90 days
30 days
05 days
15 days
90 days
[(60,00,000/360) 90] = 15,00,000
[(10,00,000/360) 30] =
83,333
[(73,72,000/360) 05] = 1,02,389
[(73,72,000/360) 15] = 3,07,167
[(72,000/360) 90]
=
18,000
15 days
[(73,72,000/360) 15] = 3,07,167
60,000
Lump-sum
10 days
Chargeable
Current
Asset
23,78,056
[(10,00,000/360) 10 =
27,778
23,50,278
[(23,18,056.2) + 60,000]=5,23,611
18,26,667
Note: COP= Cost of R.M used +Labor cost + Factory overhead +Stores & spares
4
COP = (60,00,000 + 10,00,000) + 2,40,000 + 60,000 + 72,000 Taka
Cost Of Production (COP) = 73,72,000 Taka
Exercise
M/S General Electric Co. in support of their application for working capital loan from your bank for
Tk.18.00 lac has supplied the following information.
1. Projected annual sales (10,000 fans @ Tk.1,200)
2. Annual cost of Store and Spares
3. Annual Consumption of Raw Materials
Tk.1,20,00,000.00
Tk.72,000.00
Tk.60,00,000.00
(10,000 units @ Tk.600) (imported)
4. Annual Consumption of Raw Materials
(10,000 units @ Tk.100) (local)
Tk10,00,000.00
5. Annual Labor Charges (Tk.20,000 12)
Tk.2,40,000.00
6. Annual Overhead Cost (Tk.5,000 12)
Tk.60,000.00
7. Annual Depreciation
Tk.20,500.00
8. Cash balance-For 2 months Selling & Admn. Exp.
Tk.60,000.00
9. Credit received from the suppliers of local raw materials 10 days.
10. Tied up periods (days): Imported raw materials 90 Local raw materials 30 - Work-in-process
5 finished goods 15 stores & spares 90 and receivables 15.
Solution (Approach 2)
Items
Tied-up
Period
Working Capital Requirements
1. Inventory
a. Raw Materials imported
b. Raw Materials - local
c. Work-in-process
d. Finished goods
e. Stores & spares
90 days
30 days
05 days
15 days
90 days
[(60,00,000/360) 90] = 15,00,000
[(10,00,000/360) 30] =
83,333
[(73,72,000/360) 05] = 1,02,389
[(73,72,000/360) 15] = 3,07,167
[(72,000/360) 90]
=
18,000
2. Receivables
15 days
[(73,72,000/360) 15] = 3,07,167
10 days
23,18,056
[(10,00,000/360) 10 =
27,778
Total Working Capital
Less, Sundry Creditors
Working Capital Requirement
Less, Margin (20% on
chargeable current assets)
Chargeable
Current
Asset
22,90,278
(23,18,056.2) = 4,63,611
Permissible Bank Finance
18,26,667
Note: COP= Cost of R.M used +Labor cost + Factory overhead +Stores & spares
COP = (60,00,000 + 10,00,000) + 2,40,000 + 60,000 + 72,000 Taka
6
Cost Of Production (COP) = 73,72,000 Taka
