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Operating Cycle Method (in Hindi)
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Heena Malhotra
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Very useful information not only for students but also for those who love Science.Origin of Physics, Chemistry & Biology & their importance
  1. Management of Working Capital By Heena Malhotra


  2. Forecast/ Estimate of Working Capital Requirements O The following points highlight the top five methods for estimating working capital requirements, i.e o 1. Percentage of Sales Method o 2. Regression Analysis Method o 3. Cash Forecasting Method o 4. Operating Cycle Method o 5. Projected Balance Sheet Method By Heena Malhotra


  3. 4. Operating Cycle Method: O This method of estimating working capital requirements is based upon the operating cycle concept of working capital. The cycle starts with the purchase of raw material and other resources and ends with the realization of cash from the sale of finished goods. o It involves purchase of raw materials and stores, its conversion into stock of finished goods through work-in-process with progressive increment of labour and service costs, conversion of finished stock into sales, debtors and receivables, realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed/time duration required to complete one cycle determines the requirement of working capital - longer the period of cycle, larger is the requirement of working capital and vice-versa By Heena Malhotra


  4. Raw Material Recei vable WIP Sales FG By Heena Malhotra


  5. The duration of working capital cycle may vary depending on the nature of the business. In the form of an equation, the operating cycle process can be expressed as follows: Operating Cycle R+ W F+D-C Where, R Raw material storage period W-Work-in-progress holding period FFinished goods storage period DReceivables (Debtors) collection period CCredit period allowed by suppliers (Creditors). By Heena Malhotra


  6. The various components of Operating Cycle may be calculated as shown below: Average stock of raw material Raw Material Storage Period Average Cost of Raw Material Consumption per day Work-in-Progress holding period Average Work-in-progress inventory Average Cost of Production per day Finished Goods storageAverage stock of finished goods period Average Cost of Goods Sold per day 4Receivables (Debtors) Average Receivables Average Credit Sales per day collection period (5) |Credit period allowed by suppliers (Creditors)- Average Payables Average Credit Purchases per day


  7. The duration of working capital cycle may vary depending on the nature of the business. In the form of an equation, the operating cycle process can be expressed as follows: Operating Cycle R+ W F+D-C Where, R Raw material storage period W-Work-in-progress holding period FFinished goods storage period DReceivables (Debtors) collection period CCredit period allowed by suppliers (Creditors). By Heena Malhotra


  8. No. of days in a year Operating Number of Operating Cycles in a year Cycle period Workig Caial Regired5 r 360 ays Operaing cycle (days) Desired cash balance By Heena Malhotra


  9. 4. Operating Cycle Method: O This method of estimating working capital requirements is based upon the operating cycle concept of working capital. The cycle starts with the purchase of raw material and other resources and ends with the realization of cash from the sale of finished goods. O It involves purchase of raw materials and stores, its conversion into stock of finished goods through work-in-process with progressive increment of labour and service costs, conversion of finished stock into sales, debtors and receivables, realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed/time duration required to complete one cycle determines the requirement of working capital - longer the period of cycle, larger is the requirement of working capital and vice-versa By Heena Malhotra


  10. 5. Projected Balarice Simeet Method: o Under this method, projected balance sheet for future date is prepared by forecasting of assets and liabilities by following any of the methods stated above. O The excess of estimated total current assets over estimated current liabilities, in the projected balance sheet, is computed to indicate the estimated amount of working capital required. By Heena Malhotra