which one of the following is not a method to find working capital requirement
a) percent of sales method
b) working capital components method
c) operating cycle method
d) physical method
Answers
Explanation:
percent of sales method
Concept: The Working Capital Requirement (WCR) is a financial statistic that depicts the amount of money required to pay for current operational costs, upcoming ones, and debt repayments.
- Method of Sales as a Percentage
The simplest approach for determining a company's need for working capital is the percentage of sales method. This approach is predicated on the idea that "history repeats itself." For estimation, a relationship between sales and working capital is calculated for, let's say, the previous five years. The following year's estimation is done based on this estimate if it is consistently close to, say, 40%, i.e., the working capital level is 40% of sales. If sales of $500 million are projected, working capital of $200 million will be needed.
This approach has the benefit of being very easy to comprehend and calculate. The assumption's drawback is that it is challenging for many businesses to verify. Therefore, where there is not a linear relationship between revenue and working capital, this strategy is not applicable. This approach is useless for brand-new startups because there is no history.
- Method of Regression Analysis
A widely used statistical estimation technique for numerous forms of estimation is regression analysis method. It seeks to establish a correlation between trends. It will be utilised to estimate working capital. This approach uses an equation to describe the relationship between revenue and working capital: working capital = intercept + slope * revenue. The working capital change rate per unit change in revenue is known as the slope. The intersection of the working capital axis and the regression line is the intercept.
- Operating Cycle Approach
The operational cycle approach is arguably the best one because it estimates working capital while taking into account the real business or industry condition. This approach can be used to formulate a broad rule. The need for working capital increases as the working capital operating cycle lengthens, and vice versa. We also concur on this aspect. To estimate or determine working capital, apply the formula below.
Working Capital = Estimated Cost of Goods Sold (Number of Operating Cycle Days / 365 Days) plus the Bank and Cash Balance
Given: MCQ regarding working capital requirement
To find: the correct option out of the four options
Solution: the method which is not used to find working capital requirement is physical method.
#SPJ3