WELCOME

Receivables and
working capital
management
Rahul Mukundan
S2 MBA
RECEIVABLE
MANAGEMENT
PROBLEM NO 1
A company plans to extend credit facilities to the following
categories of customers,
(A) customers with a 10% risk on non- payment and
(B) customers with a 30% risk of non payment.
The incremental sales expected in the case of category (A) are
Rs40,000 while in the case of category (B) they are Rs
50,000.
The cost of production and selling cost are 60% of sales while
collection cost amounts to 5% of sales in the case of
category (A) and 10% of sales in the case of category (B).
You are required to advise the firm about extending credit
facilities to each of the above category of customers.
PROBLEM NO 2
Sun star Ltd propose to liberalize its credit
facilities and also to increase the sales . The
liberalized credit policy will bring
additional sales of Rs 3,00,000. the variable
cost will be 60% of sales and there will be
10%risk for non payment and 5% collection
cost .will the company benefit from the
credit policy ?or not?
PROBLEM 3
MNC Ltd has a present annual sales volume of 10,000units and at sales
value of Rs 30,00,000. the variable cost is Rs 200 p.u.and the fixed costs
amount to Rs 3,00,000 p.a. The present credit period allowed by the
company is 1 month. The company is considering a proposal to
increase the credit period to 2 months to 3 months and has made the
following estimates:
Particulars
Credit policy existing proposed
1 month 2 month 3month
Increased sales - 15% 30%
% of bad debts 1% 3% 5%
There will be an increase in fixed costs by Rs.50,000 on acount of increase
in sales beyond 25% of the present level.the company plans on a pre-
tax return of 20% on investment in receivable.
You are required to calculate the most paying credit policy for the
company.
PROBLEM 4
Maruthi Ltd sells 40,000 units of product per year at Rs
35p.u.the average cost p.u. is Rs 31 out of which variable
cost p.u. is Rs 28 . The average collection period is 60
days.Bad debts losses are 3% on sales and the collection
charges amount to Rs 15,000 .the company is considering
the proposal to follow strict collection policy which would
bring down the losses on account of bad debts to 1% of
sales and average collection period to 45 days.it would
however , reduce the sales volume by 1,000 units and
increase the collection expenses to Rs.25,000.
The company requires a rate of return of 25%.assume
360days in a year ,would you recommend the adoption of
new credit policy? Or not?

WORKING CAPITAL
Methods of estimating working
capital requirement
The following methods are normally employed by the organisation in order to
determine the forcasting working capital requirements.
(1) Conventional method or cash cycle method or cash forecasting methods
According to this method ,cash inflows and outflows are matched with each other.
The working capital is to be determined on the basis of the closing cash balance.
The closing balance is arrived at after considering receipts and payments of cash
made during that period.
(2) Operating cycle method
According to this method ,the working capital is determined as in the operating
cycle approach. In an manufacturing organisation the operating cycle starts from the
purchase of raw materials and ends with the conversion of cash. It indicates time
required to convert the cash into raw materials ,raw materials to work in progress,work
in progress to finished goods, finished goods to debtors and debtors back to cash. This
continuous process is called operating cycle. Each stage of this cycle will require some
relevant days for their activity and also requires certain amount of investment. The
summation of stage wise investments is called the working capital of the organisation.
formula for computation of operating cycle

T=(r c) + w + f + d
T=duration of operating cycle in number of days
r=raw materials and stores storage period
c=creditors payment period
w=work in progress period
d=debtors collection period
f=finished stock storage period

(3)Percentage of sales approach
According to this method working capital is calculated on the basis of certain
percentage as against the forecasted sales . Normally ,it must be determined on the
basis of past experiences.
(4)Balance sheet method
Under this method working capital is determined with the help of the two year
balance sheets. Specifically current assets and current liabilities are considered for
calculating working capital . Here an excess current assets over the current
liabilities is known as working capital.
PROCEDURE FOR WORKOUT THE PROBLEM
Statement showing working capital
Current assets: Rs
Raw materials **
Work in progress **
Finished goods **
Debtors **
Cash **
Total current assets **
Less current liabilities:
Creditors **
Wages **
Other expenses **
Total current liabilities **
Working capital(TCA-TCL) **
Add:contingencies if any **
Total working capital required **
(1)First of all we have to find out number of units.it is the basis for
computation of cost of various element .
(2)Computation of following elements of cost:
raw materials cost **
labour cost **
overhead cost **
cost of finished goods **
cost of work in progress **
cost of debtors **
(3)Computation of finished goods:
raw material costs **
labour cost **
overhead cost **
cost of finished goods **
(4)Computation of work in progress:
raw material cost **
labour cost **
overhead cost **
work in progress **
(5)Cost of debtors:
Value of debtors should be calculated either including profit element or excluding
profit element .
PROBLEM 1
Peerless Ltd. is engaged in customer retailing. You are
required to forecast their working capital requirements
from the following information.
Projected annual sales : 6,50,000
% of N.P to cost of sales : 25%
Average credit allowed to debtors : 10 weeks
Average credit allowed by creditors: 4 weeks
Average stock carrying(in terms of sales requirements):
8week
Add 20% to allow for contingencies
Problem 2
Sathyam industries Ltd. Gives the following adjusted profit and loss accounts.
To materials used 1,20,000
To wages 20,000
To manufacturing expense
(including depreciationRs10000) 30,000
To office expenses 14,000
To selling expense 12,000
To net profit 2,50,000
By sales 2,50,000
2,50,000
It is the companys policy to maintain the following stocks:
a) Finished goods 11/2 months sales
b) Raw materials 1 months consumption
c) Work in progress is equal to 1 months production in terms of materials and months
wages and manufacturing expense
d) Credit allowed to customers 3 month and credit allowed by suppliers 2month
e) All expenses and wages one month in arrear but selling expenses are paid 2 months in
advance .
f) A safety margin of 10% on total current assets is desirable . Estimate the working capital
requirements for the company.
PROBLEM 5
Godrej company sells goods in the home market and earns a gross profit of 20% on sales . Its annual
figures are as follows:













Additional information
Credit given by suppliers 2months
Credit allowed to customers 1 month
Lag in payment of wages month
Lag in payment of administrative expenses 1 month
Selling expenses are paid quarterly in advance
Raw materials and finished goods are in stock for 1 month
Cash balance estimed to be maintained at Rs 30,000
sales 3,00,000
Material used 1,08000
Wages 96000
Manufacturing expense 1,20,000
Administrative expenses 30,000
Depreciation 12,000
Selling expenses 18,000
Income tax payable in 2 mon
instalments of which one falls in the
next year
30,000
THANK YOU