# Estimating Working Capital Requirements
Working capital = Current Assets − Current Liabilities. To estimate it, forecast the funds blocked in each component of current assets and the funds released by each current liability.
## A. Estimation of Current Assets
Each formula has the same structure: `(Estimated production or sales ÷ time periods) × cost per unit × holding period`.
i. Raw Materials Inventory
```
[Estimated Production (units) ÷ (12 months / 365 days)] × Estimated cost p.u. × Avg RM storage period
```
ii. Work-in-Progress Inventory
```
[Estimated Production (units) ÷ (12 / 365)] × Estimated WIP cost p.u. × Avg WIP holding period
```
iii. Finished Goods
```
[Estimated Production (units) ÷ (12 / 365)] × Estimated COP p.u. × Avg FG storage period
```
iv. Receivables (Debtors)
```
[Estimated Credit Sales (units) ÷ (12 / 365)] × Estimated COS (excl. dep.) p.u. × Avg collection period
```
> ⚠️ Important: For debtors and finished goods, use cash cost only — exclude profit (working capital need does not include profit) and exclude non-cash expenses like depreciation.
v. Cash & Cash Equivalents — Add the minimum desired cash/bank balance to current assets.
## B. Estimation of Current Liabilities
Current liabilities (other than bank credit) arising in the normal course reduce the working capital requirement.
i. Trade Payables
```
[Estimated credit purchase ÷ (12 / 365)] × Credit period allowed by suppliers
```
ii. Direct Wages
```
[(Estimated labour hours × wage rate per hour) ÷ (12 / 365)] × Avg time lag in payment of wages
```
iii. Overheads (excl. depreciation & amortisation)
```
[Estimated Overheads ÷ (12 / 360)] × Avg time lag in payment of overheads
```
Days in a year may be taken as 365 or 360.
## C. Working Capital Requirement Statement (format)
| Particulars | ₹ |
|---|---|
| I. Current Assets | |
| Raw materials | --- |
| Work-in-process | --- |
| Finished goods | --- |
| Trade debtors | --- |
| Bills receivable | --- |
| Prepaid expenses | --- |
| Minimum cash balance | --- |
| Gross Working Capital | --- |
| II. Current Liabilities | |
| Trade payables | --- |
| Bills payable | --- |
| Wages payable | --- |
| Payables for overheads | --- |
| III. Excess of CA over CL (I − II) | --- |
| IV. Safety / Contingency Margin | --- |
| V. Net Working Capital (III + IV) | --- |
## Methods of estimation (overview)
Working capital may also be estimated as a ratio of sales (assuming current assets move with sales) or a ratio of fixed investments. The choice depends on seasonal fluctuations, accuracy of sales forecast, investment cost and price variability. The Operating Cycle Method is the most reliable.