How to calculate working capital requirements?
To calculate working capital requirements, you can use the formula mentioned below:
Working Capital (WC) = Current Assets (CA) – Current Liabilities (CL).
If the value of total current assets is Rs. 3,00,000 and current liabilities is Rs. 1,50,000, your company’s working capital will be 3,00,000 - 1,50,000, which equals to Rs. 1,50,000.
Some of the main constituents of the current assets of a company are:
- Cash in hand
- The stock or inventory the company holds
- Debtors yet to pay their dues for purchasing goods from the company
- Expenses paid for in advance
The current liabilities may comprise:
- Outstanding payments to creditors
- Other unpaid expenses
- Other short-term debts to be paid
Here is an illustration to help you understand working capital calculation:
Say your business has the following current assets:
- Goods sold on credit: Rs. 2,00,000
- Raw materials: Rs. 2,00,000
- Cash in hand: Rs. 1,50,000
- Obsolete inventory: Rs. 40,000
- Loans given to employees: Rs. 50,000
The total value of the current asset would thus be a sum of the values given above except for cash in hand, i.e., Rs. 4,90,000. Available cash is the ultimate measure of liquidity and frequently changes with either receipt or payment. Adding it to the current assets does not accurately portray a business's liquidity.
Say your current liabilities include:
- Outstanding funds payable to creditors: Rs. 1,70,000
- Unpaid expenses: Rs. 80,000
The total value of current liabilities thus stands at Rs. 2,50,000 (A sum of the above two values).
Using the working capital formula, you can estimate the business's liquidity status.
WC = CA – CL
= Rs. 4,90,000 – Rs. 2,50,000
= Rs. 2,40,000
With the help of this formula, a business can estimate the working capital it has. In case of a deficit, the business owner can opt for a working capital loan to meet the expenditure requirements.
Bajaj Finserv brings a high-value loan of up to Rs. 50 lakh* (*Inclusive of Insurance Premium, VAS Charges, Documentation Charges, Flexi fees and Processing Fees) to help a business fund its working capital needs and operate at optimum efficiency. Avail of the loan and repay affordably with competitive interest rates on offer.
Additional Read: Importance of capital budgeting