The formula for working capital calculation involves a simple subtraction of a company’s current liabilities from the total assets currently owned by it.
Some of the main constituents of the current assets of a company are:
1. Cash in hand that a company has.
2. The stock or inventory the company holds.
3. Debtors yet to pay their dues for purchasing goods from the company.
4. Expenses paid for in advance.
The current liabilities may comprise:
1. Outstanding payments to be made to creditors.
2. Other unpaid expenses.
3. Other short- term debts to be paid off.
• Cash commitments such as buyback of shares, declared dividends, etc. to be excluded from cash-in-hand.
• Exclude non-trade receivables such as loans to employees from total debtors.
• Exclude wasted, old or obsolete inventory from total stock.
• Goods sold on credit: Rs.2,00,000
• Raw Materials: Rs.1,00,000
• Cash in hand: Rs.3,50,000
• Obsolete inventory: Rs.40,000
• Loans given to employees: Rs.50,000
•Outstanding funds payable to creditors: Rs.2,70,000
•Unpaid expenses: Rs.80,000
= Rs.5,60,000 – Rs.3,50,000
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