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How to calculate your business’ working capital requirement?

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How to calculate your business’ working capital requirement?

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. The 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.

The working capital formula is:
Working Capital = Current Assets - Current Liabilities
However, you should consider the following adjustments while making working capital calculation.
• Exclusion of cash commitments, like buy back of shares, and declared dividends from cash-in-hand.
• Removing non-trade receivables, like loans given to employees from the total value of debtors.
• Deducting old, wasted, and obsolete inventory from the total stock.

An Example:
Say, your business has the following current assets:
• Machinery: 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

The current liabilities include:
• Outstanding funds payable to creditors: Rs.2,70,000
• Unpaid expenses: Rs.80,000
Your business’ total current liabilities = Rs.2,70,000 + Rs.80,000 = Rs.3,50,000.
And, the total value of current assets = Rs.2,00,000 + Rs.1,00,000 + 3,50,000 - Rs.40,000 - Rs.50,000 = Rs.5,60,000.
Therefore, Working Capital (current assets – current liabilities) is calculated as:
Rs.(5,60,000 – 3,50,000) = Rs.2,10,000.

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