Financial Management

By:
BITS Pilani Dr. Vaishali Pagaria
Work Integrated Learning
Programmes Division vaishali.pagaria@wilp.bits-pilani.ac.in
 BITS Pilani
Work Integrated Learning
Programmes Division

4: Working Capital Management

4.1: Basic Concepts
4.2: Cash Management
Textbook Reference
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 4.1 Review previous week's topics. Chapter 22 - 26 of text (T1)

Replay appropriate pre-recorded
content/ courseware (module
wise)

During CH 4.1 Objective of working capital management Chapter 22 - 26 of text (T1)

Static and dynamic view of working capital
Factors affecting the composition of working
capital
Determination of working capital - operating
cycle and simulation approaches
Evaluation of working capital management

Post CH 4.1 Review reference chapters from textbook; Chapter 22 - 26 of text (T1)
replay videos as needed to clarify
understanding; do the assigned homework

10/20/2024 Dr. Vaishali Pagaria 3 BITS Pilani, WILPD

Pre-recorded lectures

Pre-recorded sessions on Working capital management 4.3

10/20/2024 Dr. Vaishali Pagaria 4 BITS Pilani, WILPD

What is Working Capital?

• The capital of a business which is used in its day-by-day

trading operations.
• It’s a short-erm financial decisions typically involve cash
flows within a year or within the operating cycle of the
firm.
• There are two views of working capital
1. Static view
2. Dynamic view

10/20/2024 Dr. Vaishali Pagaria 5 BITS Pilani, WILPD

Static and Dynamic View of
WC
Static View of WC Dynamic View of WC
• Gross Working Capital Working capital can be
(GWC) refers as total viewed as the amount of
capital required for the
investment in the current
smooth and uninterrupted
assets of the firm.
functioning of the normal
• Net Working Capital business operations of a
(NWC) is the net company ranging from the
difference between CA procurement of raw materials,
and CL of the firm. It can converting the same into
be positive or negative finished products for sale and
realizing cash along with profit
from the accounts receivables
that arise from the sale of
finished goods on credit.

10/20/2024 Dr. Vaishali Pagaria 6 BITS Pilani, WILPD

Factors Affecting the
Composition of WC
• Nature of Business: Service firm vs.
Manufacturing firm
• Seasonality of operations: seasonal
business
• Production policy: constant production
• Market conditions: market structure
• Conditions of supply: supply of production
inputs

10/20/2024 Dr. Vaishali Pagaria 7 BITS Pilani, WILPD

Proportion of CA and FA

Current Fixed Assets Industries

Assets (%) (%)
10-20 80-90 Hotel and Restaurants
20-30 70-80 Electricity Generation and Distribution
30-40 60-70 Aluminium, Shipping
40-50 50-60 Iron and Steel, Basic Industrial
Chemicals
50-60 40-50 Tea Plantation
60-70 30-40 Cotton Textiles, Sugar
70-80 20-30 Edible Oils, Tobacco
80-90 10-20 Trading, Construction

10/20/2024 Dr. Vaishali Pagaria 8 BITS Pilani, WILPD

Working Capital Management

• Management of working capital refers to the

management of CA and CL

Objective of Working Capital Management

1. Liquidity Vs. Profitability
2. Choosing the pattern of financing: the maturity
of the sources of finance should match the
maturity of the assets being financed.

10/20/2024 Dr. Vaishali Pagaria 9 BITS Pilani, WILPD

Inter-dependency Among the
Components of WC: CA Cycle

10/20/2024 Dr. Vaishali Pagaria 10 BITS Pilani, WILPD

Financing of WC

Short-term Financing
• Bank credit
• Transaction credit
• Advances from customers
• Bank advances
• Loans
• Overdraft
• Bills purchase and discounted
• Advance against documents of title of goods
• Term loans by bank
• Commercial paper
• Bank deposits, etc.

10/20/2024 Dr. Vaishali Pagaria 11 BITS Pilani, WILPD

Need for WC

• Inventory management
• Receivable management
• Cash management

10/20/2024 Dr. Vaishali Pagaria 12 BITS Pilani, WILPD

Inventory Management

• Inventory represents by the largest portion

of current assets.

• Effective and efficient management of

inventories helps in
• minimising cost of holding inventories,
• minimising risks and losses due to stockout, and
• keeping the investment in inventories at a reasonable level.

10/20/2024 Dr. Vaishali Pagaria 13 BITS Pilani, WILPD

Benefits of Carrying
Inventories
To ensure uninterrupted A firm with sufficient
production and to avoid stock of materials in hand
catastrophe of is also relieved of the
breakdown of whole dangers of breakdowns in
operation, the firm must the productive process
carry an inventory of raw further minimises cost of
materials. production.

Purchase of materials in
huge quantity will be
economical because that
would result in
substantial savings in the
cost of goods sold.

10/20/2024 Dr. Vaishali Pagaria 14 BITS Pilani, WILPD

Costs of Carrying Inventories

• Storage
Carrying • Handling, loss in value due to
obsolescence and physical

Cost deterioration,
• Taxes, insurance, financing

• Cost of placing orders for new

Ordering inventory (fixed cost)
• Cost of shipping and receiving new

Cost inventory (variable cost)

10/20/2024 Dr. Vaishali Pagaria 15 BITS Pilani, WILPD

Economic Oder Quantity
(EOQ) Approach
• According to EOQ approach optimal level of investment
in inventory is one where total cost of inventory
comprising carrying and ordering costs will be minimum.

EOQ =
Where,
A = Annual usage quantity
O = Ordering cost per order
CC = Annual carrying cost per unit
(price per unit X carrying cost per unit in percentage)

10/20/2024 Dr. Vaishali Pagaria 16 BITS Pilani, WILPD

Reordering Level = Maximum Consumption x Maximum
Reorder period
Minimum Stock Level = Reordering Level – (Normal
Consumption x Nominal Reordering Period)
Maximum Stock Level = Reordering Level + Reorder
Quantity – (Minimum Consumption x Reorder period)

10/20/2024 Dr. Vaishali Pagaria 17 BITS Pilani, WILPD

Exercise

From the following information, calculate minimum stock

level, maximum stock level and re-ordering level:
(i) Maximum Consumption = 200 units per day
(ii) Minimum Consumption = 120 units per day
(iii) Normal Consumption =160 units per day
(iv) Reorder period = 10-15 days
(v) Reorder quantity = 1,600 units
(vi) Normal reorder period = 10 days.

10/20/2024 Dr. Vaishali Pagaria 18 BITS Pilani, WILPD

Illustration

1. The demand for a certain item is random. It has been

estimated that monthly demand of the item has a normal
distribution with a mean of 780 units. The unit price of the
item is Rs.25. ordering cost is Rs.28 and the inventory
carrying cost is estimated to be 35 per cent year. Determine
EOQ.

2. Hindustan Engineering Factory consumes 75000 units of a

component per year. The ordering, receiving and handling costs
are Rs.6 per order while transportation cost is Rs.24 per order.
Depreciation and obsolescence cost is Rs.0.008 per unit per
year, interest cost Rs.0.12 per unit per year, storage cost
Rs.2000 per year for 75000 units. Calculate EOQ.

10/20/2024 Dr. Vaishali Pagaria 19 BITS Pilani, WILPD

 BITS Pilani
Work Integrated Learning
Programmes Division

Receivable Management

10/20/2024 Dr. Vaishali Pagaria 20

Receivable Management

Receivable is defined as “debt owed to the firm by

customers arising form sale of goods or services in the
ordinary course of business.”
Account receivables…..
• risk involvement
• based on economic values
• implies futurity
Objective of receivable management
• Maximising the value of the firm
• Optimum investment in sundry debtors
• Control and managing the cost of trade credit

10/20/2024 Dr. Vaishali Pagaria 21 BITS Pilani, WILPD

5 C’s Analysis

Behavioral Analysis (5 C’s of the Credit Assessment)

1. Character – The applicant’s intrinsic desire to honor terms and conditions of the
2. Capacity – The applicant’s capacity to pay interest and principal as per the
agreement
3. Capital – Quantum of equity capital and extent of ‘Leverage”
4. Collateral – The availability of assess available as security against the credit
5. Condition – The economic trends and development in the industry and the
macro economic context of the county

10/20/2024 Dr. Vaishali Pagaria 22 BITS Pilani, WILPD

Illustration
You are an experienced loan manager at ICICI Bank Small and Medium Enterprises branch at Chennai. You have
been allotted the following two customer files for you to analyze and decide whether to give a loan or not:

File #1 – Mr. Krishna Kumar Malani is applying for a loan of Rs. 25 lakhs on behalf of his business Malani Exports
Pvt. Ltd. He is the Managing Director of the company. In the recent board meeting held at Hyderabad it was
decided that the company will open a new factory in Hyderabad for which Mr. Malani is seeking the new loan.
Malani Exports has one factory in Bangalore, which is in business since last 5 years. They had earlier taken a
loan of Rs, 15 lakhs from ICICI Bank for their Bangalore branch and repaid it successfully. The company was
never late on its EMI payments relating to the previous loan. The Bangalore factory is generating a net
income of Rs. 40 lakhs per annum. The land and building of the Bangalore factory valued at Rs. 1.2 Crores
has been pledged with the bank as collateral.

File #2 – Mr. Ramesh Kumar is applying for a loan of Rs. 75 lakhs on behalf of his business Kumar Granites Pvt.
Ltd. He is the Managing Director of the company. In the recent board meeting held at Chennai it was decided
that the company will open a new showroom at Salem, Tamilnadu for which Mr. Kumar is seeking the new
loan. Kumar Granites has one showroom in Chennai, which is in business since last 3 years. They had earlier
taken a loan of Rs. 25 lakhs from ICICI Bank for their Chennai showroom. The loan is yet to be repaid fully.
The company was late a few times on its EMI payments relating to the previous loan and the management
could not give a good reason or explanation for the late payments. The Chennai showroom is generating a
net income of Rs. 10 lakhs per annum. The Chennai showroom is on rented premises. No property has been
pledged with the bank as collateral.
What are the 5 C’s of Credit Analysis? Name and Explain each C succinctly.
Whom should the bank lend the money based on the 5 C's of Credit Analysis?

10/20/2024 Dr. Vaishali Pagaria 23 BITS Pilani, WILPD

Receivable Management

Cost of Receivable Management

• Capital cost
• Collection cost
• Bad debts

Benefits of Receivable Management

• Increased sales
• Increased market share
• Increase profit

10/20/2024 Dr. Vaishali Pagaria 24 BITS Pilani, WILPD

APPROACHES TO EVALUATION OF
CREDIT
POLICIES
1. Total Approach, and
2. Incremental Approach

10/20/2024 Dr. Vaishali Pagaria 25 BITS Pilani, WILPD

Total Approach

10/20/2024 Dr. Vaishali Pagaria 26 BITS Pilani, WILPD

Incremental Approach

BITS Pilani, WILPD

Contd..

Here
(i) Total Fixed Cost = [Average Cost per unit – Variable
Cost per unit] × No. of units sold on credit under Present
Policy
(ii) Opportunity Cost =
Total Cost of Credit Sales × (Collection period (Days)/ 365
(or 360) ) x (Required Rate of Return)/100

10/20/2024 Dr. Vaishali Pagaria 28 BITS Pilani, WILPD

Illustration
A trader whose current sales are in the region of Rs. 6 lakhs per annum and an
average collection period of 30 days wants to pursue a more liberal policy to
improve sales. A study made by a management consultant reveals the
following information:-

The selling price per unit is Rs. 3. Average cost per unit is Rs. 2.25 and variable
costs per unit are Rs. 2. The current bad debt loss is 1%. Required return on
additional investment is 20%. Assume a 360 days year. Analyze which of the
above policies would you recommend for adoption?

10/20/2024 Dr. Vaishali Pagaria 29 BITS Pilani, WILPD

Practice Problem 1:
Receivable Management
XYZ Corporation is considering relaxing its present credit policy and is
in the process of evaluating two proposed policies. Currently, the
firm has annual credit sales of Rs. 50 lakhs and accounts
receivable turnover ratio of 4 times a year. The current level of loss
due to bad debts is Rs. 1,50,000. The firm is required to give a
return of 25% on the investment in new accounts receivables. The
company’s variable costs are 70% of the selling price. Given the
following information, identify which is the better option?

10/20/2024 Dr. Vaishali Pagaria 30 BITS Pilani, WILPD

Practice Problem 2:
Receivable Management
TechGad is contemplating revising its credit standards to
boost its current sales of $2 billion. If the proposed
changes are implemented, sales are anticipated to surge
by 25% over the next fiscal years. Additionally, the
average collection period is projected to extend from 45
to 60 days, while the expected bad debts will rise from
1.5% to 4% of sales. Each gadget is priced at $800, with
variable costs amounting to $600 per unit. TechGad's
cost of capital stands at 12%. Conduct an analysis of the
proposed adjustments and provide a recommendation to
the company. Assume a year comprises 360 days.

10/20/2024 Dr. Vaishali Pagaria 31 BITS Pilani, WILPD

Determination of WC

1. Operating Cycle Approach

• Operating cycle is the time duration required to convert
sales, after the conversion of resources into inventories,
into cash.
• Operating Cycle involves three phases
Manufacture of Sale of the
the product product either
Acquisition of
which includes for cash or on
resources such
conversion of credit. Credit
as raw material,
raw material sales create
labour, power
into work-in- account
and fuel etc
progress into receivable for
finished goods collection

10/20/2024 Dr. Vaishali Pagaria 32 BITS Pilani, WILPD

Operating and Cash Cycle

10/20/2024 Dr. Vaishali Pagaria 33 BITS Pilani, WILPD

1. Operating Cycle Approach

The length of Operating Cycle of a manufacturing firm can

be calculated….

• Inventory turnover period =

• Debtors (Receivable) turnover period =
• Creditors (Payables) deferral period =
• Operating Cycle = Inventory turnover period + debtors
turnover period
• Cash cycle = Operating cycle – Creditors deferral period

10/20/2024 Dr. Vaishali Pagaria 34 BITS Pilani, WILPD

Illustration

From the following information of Horizon Ltd. Calculate

operating cycle and cash cycle and comments on
company’s WC position.
Sales : 800
COGS: 720
Inventory : Beginning of the year 2010 is 96 and end of the
year it is 102
Accounts Receivable(Debtors): Beginning of the year 2010
is 86 and end of the year it is 90
Accounts Payable (Creditors): Beginning of the year 2010
is 56 and end of the year it is 60

10/20/2024 Dr. Vaishali Pagaria 35 BITS Pilani, WILPD

2. Cash Cost Approach

Two steps procedure:

1. Estimate the cash cost of various current assets
required by the firm. The cash cost of a current assets
is:
1. Profit element, if any, included in the value
2. Non-cash charges like depreciation, if any, included in the value

2. Deduct the spontaneous current liabilities from the cash

cost of current assets. This includes
1. Trade credit
2. Accruals of wages on expenses

10/20/2024 Dr. Vaishali Pagaria 36 BITS Pilani, WILPD

Format for Estimation of WC

1. Calculate TCA
2. Calculate TCL
3. Calculate WC = TCA -TCL
4. Add Provision or Margin of Safety
5. Net Working Capital

10/20/2024 Dr. Vaishali Pagaria 37 BITS Pilani, WILPD

Detailed Format
Estimate Working Capital on Cash Cost Basis

Sr. No. Particulars Months Cash Cost Amount

A Estimation of Current Assets

1Inventory
iRaw Materias
iiWork-in-process
Raw Materias (Mfg. cost)
Direct labour (to the extent of completed stage)
Overheads (to th extent of completed stage)
iiiFinished godds inventory
2Debtors
3Cash balance requried
Total Current Assets

B Estimation of Current Liabilities

1Creditors
2Wages
3Mfg. exp and overheads
Total Current Liabilities

Net Working Capital (TCA - TCL)

Add: Contingency (percentage on Net Working Capital)

Estimated Net Working Capital

10/20/2024 Dr. Vaishali Pagaria 38 BITS Pilani, WILPD

Illustration 1: Cash Cost Base

Kotex Ltd. Sells goods at a profit margin of 25 percent counting

depreciation as part of the cost of manufacture. Its annual figures are as
follows:

Sales (two month credit is given) : Rs. 240 million

Material cost (suppliers give three months credit): Rs.72 M
Wages (paid one month in arrears): 48 M
Manufacturing exp. Outstanding at the end of the year (cash expenses
are paid one month in arrears): 4 M
Administrative and sales exp.(paid as incurred): 30 M

Kotex Ltd keeps two months’ stock of raw materials and one month’s
stock of finished goods. It wants to maintain a cash balance of Rs. 5
million. Estimate the requirement of working capital on cash cost basis,
assuming a 10 percent safety margin. Ignore work in process.
10/20/2024 Dr. Vaishali Pagaria 39 BITS Pilani, WILPD
Illustration 2: Cash Cost Base

From the following information of VSGR Company Ltd/.

estimate the working capital needed to finance a level of
activity of 1,10,000 units of production after adding a 10 per
cent safety contingency.
Cost per unit
(Rs)
Raw materials 78
Direct labour 29
Overheads (excluding depreciation) 58
Total cost 165
Profit 24
Selling price 189

10/20/2024 Dr. Vaishali Pagaria 40 BITS Pilani, WILPD

Illustration 2: Cash Cost Base
Contd….
Additional information
1. Average raw materials in stock: one month
2. Average materials-in-process (50 percent completion stage): half a
month
3. Average finished goods in stock: one month
4. Credit allowed by suppliers: one month
5. Credit allowed to customers: two months
6. Time lag in payment of wages: one and half weeks
7. Overhead expenses: one month

One fourth of the sales is on cash basis. Cash balance is expected to be

Rs.2,15,000. You may assume that production is carried on evenly
throughout the year and wages and overhead expenses accrue similarly.

10/20/2024 Dr. Vaishali Pagaria 41 BITS Pilani, WILPD

Evaluation of WC
Management
• Liquidity
• Availability of Cash
• Inventory turnover
• Credit extended to customers
• Credit obtained from suppliers

10/20/2024 Dr. Vaishali Pagaria 42 BITS Pilani, WILPD

Practice Problems

1. The relevant financial information for Xavier Ltd. For the

year ended 2011 is given below:
Profit & Loss A/C Data Balance Sheet Data
(Rs. Million)
Particulars Beginning End of the
of the year year 2011
2011
Sales 80 Inventory 9 12
COGS 56 Debtors 12 16
Creditors 7 10

What is the length of the operating cycle? The cash cycle?

Assume 365 days to a year.

10/20/2024 Dr. Vaishali Pagaria 43 BITS Pilani, WILPD

Practice Problems

2. The relevant financial information for Zenith Ltd. For the

year ended 2011 is given below:
Profit & Loss A/C Data Balance Sheet Data
(Rs. Million)
Particulars Beginning End of the
of the year year 2011
2011
Sales 500 Inventory 60 64
COGS 360 Debtors 80 88
Creditors 40 46

What is the length of the operating cycle? The cash cycle?

Assume 365 days to a year.

10/20/2024 Dr. Vaishali Pagaria 44 BITS Pilani, WILPD

Practice Problems
3. The following annual figures relate to XYZ Co.
Particulars Amount (Rs.)
Sales (at two months’ credit) 3600000
Materials consumed (suppliers extend two months credit) 900000
Wages paid (monthly in arrear) 720000
Manufacturing expenses outstanding at the end of the year 80000
(cash expenses are paid one month in arrear)
Total administrative exp. Paid as above 240000
Sales promotion exp. Paid quarterly in advance 120000

Company sells its products on gross profit of 25% counting depreciation as a

part of the cost of production it keeps one month’s stock each of raw materials
and finished goods, and a cash balance of Rs.100000.
Assuming a 20% safety margin, work out the working capital requirement of the
company on cash cost basis. Ignore work-in-process
10/20/2024 Dr. Vaishali Pagaria 45 BITS Pilani, WILPD
Practice Problems
4. Wax Ltd., sales goods at a gross profit of 20% . It includes depreciation as
part of cost of production. The following figures for the 12 months period ending
31st December 2013 are given to enable you to ascertain the requirements of
working capital of the company on cash cost basis. In your working, you are
required to assume that:
a. A safety margin of 15% will be maintained
b. Cash is to be held to the extent of 50% of current liabilities
c. There will be no work-in-process
d. Tax is to be ignored.
e. Stock of raw materials and finished goods are kept at one month’s
requirements

All working notes are to form part of your answer.

10/20/2024 Dr. Vaishali Pagaria 46 BITS Pilani, WILPD

Practice Problems

Financial information of Wax Ltd.

Particulars Amount (Rs.)
Sales (at two months’ credit) 2700000
Materials consumed (suppliers extend two months credit) 675000
Wages (paid at the beginning of the next month) 540000
Manufacturing expenses outstanding at the end of the year 60000
(cash expenses are paid one month in arrear)
Total administrative exp. Paid as above 180000
Sales promotion exp. Paid quarterly in advance 90000

10/20/2024 Dr. Vaishali Pagaria 47 BITS Pilani, WILPD

 BITS Pilani
Work Integrated Learning
Programmes Division

4.2 Cash Management

10/20/2024 Dr. Vaishali Pagaria 48

Introduction

• Cash is a Current Assets of the business

• Cash is in the form of hard cash or cash at bank
• Cash itself does not produce good or services. It is used
as a medium to acquire other assets.
• The idle cash can be deposited in bank to earn interest
• A firm will have to maintain a critical level of cash. If at a
time it does not have sufficient cash with it, it will have to
borrow from the market for reaching the required level.

10/20/2024 Dr. Vaishali Pagaria 49 BITS Pilani, WILPD

Motives for Holding Cash

• Transaction Motive : To meet firm’s transaction needs

• Precautionary Motive: To meet uncertainty about the
magnitude and timing of cash inflows
• Speculative Motive: To tap profit making opportunities
arising from fluctuations in commodity prices, security
prices, interest rates and foreign exchanges.

10/20/2024 Dr. Vaishali Pagaria 50 BITS Pilani, WILPD

Cash Management

• The liquidity provided by the cash holding is at the

expense of profits sacrificed by foregoing alternative
investment opportunities.

Hence, the financial manager should

1. Establish reliable forecasting and reporting systems
2. Improve cash collection and disbursements
3. Achieve optimal conservation and utilization of funds.

10/20/2024 Dr. Vaishali Pagaria 51 BITS Pilani, WILPD

Financing of Current/Cash
Assets

Long-term Financing Short-term Financing

• Share capital • Bank credit
• a. Equity share capital • Transaction credit
• b. Preference share capital • Advances from customers
• Debentures • Bank advances
• a. Convertible debentures • Loans
• b. Non-convertible debentures • Overdraft
• c. Redeemable debentures • Bills purchase and discounted
• d. Non-Redeemable debentures • Advance against documents of title of
• Bonds goods
• Loans from banks & financial institutions • Term loans by bank
• Retained earnings • Commercial paper
• Venture capital fund for innovative • Bank deposits, etc.
projects

10/20/2024 Dr. Vaishali Pagaria 52 BITS Pilani, WILPD

Cash Budgeting

• Cash budgeting or short-term cash forecasting is the

principal tool of cash management. This is helpful in

Estimating cash requirements

Planning short-term financing

Scheduling payments in connection with capital expenditure projects

Planning purchases of materials

Developing credit policies

Checking the accuracy of long-erm forecasts

10/20/2024 Dr. Vaishali Pagaria 53 BITS Pilani, WILPD

Receipts and Payment Method

• Cash budget prepared under this method

shows the timing and magnitude of
expected cash receipts and payments
over the forecast period.
• It includes all expected receipts and
payments irrespective of how they are
classified in accounting.

10/20/2024 Dr. Vaishali Pagaria 54 BITS Pilani, WILPD

Cash Receipts & Payments:
Basis of Estimation
Items Basis of Estimation
Cash Sales Estimated sales and its division between cash
and credit sales

Collection of dividend receivable Estimated sales, its division between cash

and credit sales, and collection pattern

Interest and dividend receipts Firm’s portfolio of securities and return

expected from the portfolio

Increase in loans/deposits and issue of Financing plan

securities

Sale of assets Proposed deposal of assets

Cash purchases Estimated purchases, and its division
between cash and credit purchases

10/20/2024 Dr. Vaishali Pagaria 55 BITS Pilani, WILPD

Cash Receipts & Payments:
Basis of Estimation
Items Basis of Estimation
Payment for purchases Estimated purchases, its division between
cash and credit purchases, and payment
terms

Wages and salaries Manpower employed, wages and salaries

structure

Manufacturing expenses Production plan

General, admin and selling exp. Admin and sales personnel and proposed
sales promotion and distribution exp.

Capital equipment purchases Capital expenditure budget and payment

pattern associated with capital equipment
purchases

Repayment of loans and retirement of Financing plan

securities

10/20/2024 Dr. Vaishali Pagaria 56 BITS Pilani, WILPD

Practice Problem 1
From the following information, prepare cash budget for the month of January to April

Expected Sales (Rs.) Expected Purchases (Rs.)

Jan 60000 Jan 48000
Feb 40000 Feb 80000
March 45000 March 81000
April 40000 April 90000

Wages to be paid to workers Rs. 5,000 each month. Balance at the bank on 1st Jan.
Rs.8,000. It has been decided by the Management that:
(i) In case of deficit fund within the limit of Rs.10,000 arrangements can be made with
bank.
(ii) In case of deficit fund exceeding Rs. 10,000 but within the limits of Rs. 42,000 issue
of debentures is to be preferred.
(iii) In case of deficit fund exceeding Rs. 42,000, issue of shares is preferred
10/20/2024 Dr. Vaishali Pagaria 57 BITS Pilani, WILPD
Practice Problem 2
Prepare Cash Budget of a Company for April, May and June 2019 in a columnar form
using the following information
Month Sales Purchase Wages Exps.
Jan 80,000 45,000 20,000 5,000
Feb 80,000 40,000 18,000 6,000
March 75,000 42,000 22,000 6,000
April 90,000 50,000 24,000 6,000
May 85,000 45,000 20,000 6,000
June 80,000 35,000 18,000 5,000

You are further informed that:

(a) 10% of purchase and 20% of Sale are for cash
(b) The average collection period of the Co. is 1/2 month and credit purchase is paid off regularly after
one month
(c) Wages are paid half monthly and the rent of Rs.500 excluded in expense is paid monthly
(d) Cash and Bank Balance on April 1, was Rs.15,000 and the company wants to keep it on end of
every month below this figure, the excess cash being put in fixed deposits.
10/20/2024 Dr. Vaishali Pagaria 58 BITS Pilani, WILPD
Practice Problem 3
From the following information prepare a monthly cash budget for the three months
ending 31st Dec.2019.

Admin.
Production
Sales Materials Wages Selling,
Month O/H
(Rs.) (Rs.) (Rs.) etc.
(Rs.)
(Rs.)
June 3,000 1,800 650 225 160
July 3,250 2,000 750 225 160
Aug. 3,500 2,400 750 250 175
Sep. 3,750 2,250 750 300 175
Oct. 4,000 2,300 800 300 200
Nov. 4,250 2,500 900 350 200
Dec. 4,500 2,600 1,000 350 225

10/20/2024 Dr. Vaishali Pagaria 59 BITS Pilani, WILPD

Practice Problem 3

(i) Credit terms are:

(a) Sales — 3 months to debtors. 10% of sales are on cash. On an average, 50%
of credit sales are paid on the due dates while the other 50% are paid in the month
following
(b) Creditors for material — 2 months.
(ii) Lag in payment: Wages. 1/4 month, overheads — 1/2 month.
(iii) Cash and Bank Balance on 1st Oct. expected Rs.1,500.
(iv) Other information
(a) Plant and Machinery to be installed in Aug. at a cost of Rs.24,000. It will be paid
for by monthly installments of Rs.500 each from 1st Oct.;
(b) Preference share dividend @ 5% on Rs.50,000 are to be paid on 1st Dec.
(c) Calls on 250 equity shares @ Rs.2 per share expected on 1st November;
(d) Dividends from investments amounting to Rs.250 are expected on 31st Dec.;
(e) Income tax (advance) to be paid in December Rs. 500

10/20/2024 Dr. Vaishali Pagaria 60 BITS Pilani, WILPD

Practice Problem 4

From the following forecast of income and expenditure, prepare cash

budget for the months January to April, 2015.

Months Sales Purchases Wages Mfg. exp Admin Exp Selling

Exp
2014
Nov 30,000 15,000 3,000 1,150 1,060 500
Dec 35,000 20,000 3,200 1,225 1,040 550

2015
Jan 25,000 15,000 2,500 990 1,100 600
Feb 30,000 20,000 3,000 1,050 1,150 620
March 35,000 22,500 2,400 1,100 1,220 570
April 40,000 25,000 2,600 1,200 1,180 710

10/20/2024 Dr. Vaishali Pagaria 61 BITS Pilani, WILPD

Practice Problem 4

Additional Information

1. The customers are allowed a credit period of 2 months.

2. A dividend of Rs. 10,000 is payable in April.
3. Capital expenditure to be incurred: Plant purchased on
15th January for Rs. 5,000; a Building has been purchased on
1stMarch and the payments are to be made in monthly installments
of Rs. 2,000 each.
4. The creditors are allowing a credit of 2 months.
5. Wages are paid on the 1st of the next month.
6. Lag in payment of other expenses is one month.
7. Balance of cash in hand on 1st January, 2015 is Rs. 15,000

10/20/2024 Dr. Vaishali Pagaria 62 BITS Pilani, WILPD

 THANK YOU!!!

10/20/2024 Dr. Vaishali Pagaria 63 BITS Pilani, WILPD