Q.A trading concern estimates the following for the coming year: annual credit purchases ₹7,20,000; annual credit sales ₹9,60,000. It plans to hold stock equal to 1 month's purchases, to allow customers 2 months' credit, to receive 1 month's credit from suppliers, and to keep a minimum cash and bank balance of ₹30,000. Estimate the working capital requirement. (Value stock and creditors at cost/purchase value and debtors at sales value.)

Estimated working capital is the total of the estimated current assets (stock, debtors and cash) minus the estimated current liabilities (creditors).

Stock is 1 month of ₹7,20,000 purchases (₹60,000), debtors are 2 months of ₹9,60,000 sales (₹1,60,000) and cash is ₹30,000, giving current assets of ₹2,50,000; creditors are 1 month of purchases (₹60,000), so the estimated working capital is ₹1,90,000.

The working capital required is the total of the estimated current assets tied up in the business, less the estimated current liabilities (the credit received from suppliers). Each estimate is based on the stated period of the relevant annual figure.

Step 1 — Estimate the current assets.

Step 2 — Estimate the current liabilities.

Step 3 — Compute the estimated working capital.

Working Capital = Estimated Current Assets − Estimated Current Liabilities

Working Capital = ₹2,50,000 − ₹60,000 = ₹1,90,000

Verification (dual-check). Stock: 7,20,000 ÷ 12 = 60,000. Debtors: 9,60,000 × 2 ÷ 12 = 1,60,000. Current assets: 60,000 + 1,60,000 + 30,000 = 2,50,000. Creditors: 7,20,000 ÷ 12 = 60,000. Working capital: 2,50,000 − 60,000 = 1,90,000. Every figure re-computes to the same value, so the estimate is confirmed at ₹1,90,000.

Some textbooks value debtors at cost of sales rather than at sales value, which would reduce the debtors figure and hence the working capital estimate. The valuation basis must always be taken from the wording of the question; here the question specifies debtors at sales value, so ₹1,60,000 is correct.

Students often compute the two-month debtors figure as ₹9,60,000 × 2 (treating the annual figure as monthly) instead of ₹9,60,000 × 2/12 — always convert the annual figure to the correct number of months first. Forgetting to deduct creditors, or deducting them from debtors alone rather than from total current assets, is another common slip.