MD MAMUN UR RASHID, NBL, Dhaka, Bangladessh, cell 01828525695 Assessment of Working Capital Requirement

Part-I: Mr Tarek Ali proposes to establish a small-scale enterprise for manufacture of cycles. He will manufacture 2000 by-cycles per year at maximum attainable production capacity. He is an expert mechanic, but does no know about accountancy. He applies to you for a cash credit limit of Tk. 15 lac for financing his working capital requirements. You are the manager of the branch. When you ask him how has he calculated his needs, he is not able to give you satisfactory reply. He simply says that some how or the other, he feels that his requirement is not less that this amount. He is, however, prepared to supply any information you require to assess his needs and discuss the natter with you. What data you require for calculation of his working capital requirements? Answer:

1. Cash 2. Raw Materials-Local and Imported 3. Work in Process 4. Finish Goods 5. Credit Arrangements 6. Receivables Part II: The following conversation takes place between you and Mr. Tarek Ali when he calls you next to supply information required by you: You: How many bi-cycles will you be able to sell during the next year? TA: 1200 You: what could be your selling price? TA: Tk. 9000/- per bi-cycle You: Will you import raw-materials direct? TA: No, Locally available imported raw materials will be used You: What will be the cost of raw materials & stores etc. used per bi-cycle? TA: Tk. 4500/You: How much will you have to pay for the labour and other manufacturing costs every month? TA: Tk. 20000/- per month You: What will be your non-manufacturing overheads like? TA: Tk. 20000/- per month You: How many days stock of raw materials & stores etc. you will like to carry with you always? TA: 60 days You: How many days will it take for a raw material to be processed and converted into a bi-cycle? TA: 6 days You: How many days stock of finished goods will remain in godown?

MD MAMUN UR RASHID, NBL, Dhaka, Bangladessh, cell 01828525695

TA: 30 days The conversation ends at this stage. Have you obtain all the information required for calculation of working capital requirements? Answer: If yes, then go for credit arrangement Part III: On being asked, Mr. Tarek Ali gives you the following further information: 1. Customers will be granted two months credit after delivery 2. Purchases will be paid 45 days after receipt of the goods 3. Average credit sales will be 50% of total sales At this stage, let us assume the information supplied by Mr. Tarek Ali in respect of assessing working capital needs are found correct. You are required to calculate the maximum working capital requirements of Mr. Tarek Ali and also the maximum permissible limit which you can set up in favour of Mr. Tarek Ali?

MD MAMUN UR RASHID, NBL, Dhaka, Bangladessh, cell 01828525695

Part- IV: Solution:

Data Avail able: 1. Annual Sales 2. Annual Consumption of raw materials & stores etc. 3. Annual labour and othere manufacturibg costs 4. Non-manufacturibg overhead 5. Stock of raw materials and stores etc. 6. Production cycle periods 7. Stock of finished goods 8. Credit given to customers 9. Credit received from suppliers For calculations take 360 days in a year.

1200*Tk. 9000 Tk. 10800000 1200*Tk. 4500 Tk. 5400000 Tk. 20000*12 Tk. 240000 Tk. 20000*12 Tk. 240000 60 days consumption 6 day's cost of productio 30 day's cost of productio 60 days 45 days

MD MAMUN UR RASHID, NBL, Dhaka, Bangladessh, cell 01828525695 Assessment of Working Capital Requirement
1 2 3 4 5 6 Raw Materials & Stores etc. for 60 day's consumption Work -in-process (6 day's cost of Production) Finished Goods ( 30 days' cost of Production) Receivables ( 60 days' cost of Production) Non-Manufacturing Expenses ( Say for 2 months) Less Credit Received ( 45 days' raw-materials & stores etc. consumption) Workin Capital Required Less Margin Requirement( Say 25%) Amount in Tk. 900000.00 94000.00 470000.00 470000.00 40000.00

675000.00 1299000.00 324750.00 974250.00

7 8 9

Bank Finance Permissible