hello everyone this is Dr Mahir Shah once again with another video in this video we are going to learn how to solve problem sum based on working capital financing under the subject strategic financial management again a very important topic for all the tybms students appearing for semester 6. now in order to solve the sum okay we will be first going through a format some working notes and some formulas okay in order to solve the sum so first we'll go with the format some working nodes some formulas and thereafter we'll be solving one important sum which mostly covers up each and every uh thing related to working capital financing so let us see first what is the format for solving some based on working capital okay here is the statement showing the working working capital needed we have particulars we have formula carbon column and then we have a mount common column working capital basically is nothing but the difference between your current asset and your current liability okay under current current asset remember there has to be five minimum these five things stop the raw material work in process under which you have again raw material labor and overheads finish Goods debtors and cash these are the five things that has to be there in your current asset once you get the value we get the total current asset after that we load down the current liability now there are only two things which have to remember current liabilities we have creditors and we have outstanding again outstanding has labor and overheads when you subtract total CA with total CL you get a gross working capital in the question if there is any margin of safety given to us then we added to working capital and that becomes a networking capital if there is no net margin given or you know margin of safety given then your gross working capital eventually becomes your networking capital okay formula the formula is very simple as unit multiplied by the rate multiply by the period unit and rate will appear from the working nodes that we will create in it is the only thing which we'll have to check in the question okay now I want everyone to see that your load down this particular format and one more very important thing after noting the format some rules the rules stated that is work in process labor and overhead whatever answer you will get will have to take half of that because the work is still not done so labor and overhead under working process will always be half for finished goods the rate will be always taken as cost of production car rate for debtors it will always be taken as selling price car rate and for creditors it will always be taken as raw material car rate okay so these are the you know three to four simple rules that you will have to remember number one under WIP labor and overrides will always be half debtors are on selling price finish goes is on on cost of production and creditors on raw material okay well once I'll make that format see that I'll even note down these particular rules which I've written in red next after loading the format okay the next thing appear is your working nodes two working notes we have to create one will be able able to find the units the other one will be for the rate okay so for working load number one will be where you have to create a cost structure which consists of raw material plus labor plus over it that gives you cost of production plus profit gives you sales this entire format is basically used a working node is used to get the rate amount of your sum okay so all the rate will come from this particular table second we need to get the number of units so the unit formula is number of unit is equal to annual production full year cup production divided by 12 if it is monthly base divided by 52 if it is weekly based and divided by 360 if it is daily basis depending on the question okay so these are the two working nodes which are very important that we need to solve before solving the sum because from Constructor we'll be able to find the rate from uh the number of units formula will be able to get the number of units after this after getting this okay we will be solving the sum based on working capital and after solving the sum pedal they will arise one question where they will ask you to find the maximum permissible Bank funding okay or Bank financing so for that there are three formulas that we'll have to follow is called Methods of lending under tendon committee where we will be finding the maximum permissible bank finance three methods are there number one we have to get the value of 75 percent of CA minus CL that is current asset minus current liability second method is 75 percent of CA minus current liability and the third one is 75 percent of current asset minus 4 current asset whatever you get the value minus current liability okay so these are the three uh formulas that we need to load down under tundant committee whereby we will be asked to find the maximum permissible bank finance okay so now with all these three uh slides that we went through first the format and the working node and then the formulas now let us see how to actually solve the sum you know combining all the three parts of this particular sum okay here is a question in front of you all from the following figures prepare an estimate of working capital production may they have given you uh 30 000 units selling price per unit is rupees 10. raw material is 60 of selling price direct wages is 1 6 of raw material overages twice of direct wages then they are giving you some data related or months so material in hand production time finished goods in store uh they have given you credit for material credit allowed to customers uh cash balance and thereafter they said wages and overheads are paid in the beginning of next month so there's something related to outstanding also calculate the maximum permissible bank finance as pertinent committee assuming that the core current asset is 25 of total assets so core current assets 25 percent we'll have to keep that in mind while solving ahead okay now in order to solve the sum the very first thing what we have to do is first always solve the working node number one working node will be based on a cost structure where we'll be getting all the rates so let us start with that first working node okay I have you know the format is your structure raw material labor over a cop profit say let's see what what things have they given us in the question see I can see your selling price per unit is rupees 10 so we note on that selling price is 10 so we have noted that raw material is 60 of selling price so 10 60 is rupees six so raw material is six direct wages that is nothing but labor is 1 6 of raw material so raw material divided by six will give you one so labor is one so our entire cost structure is ready so all the rates will be taken from this particular table second we need to get the number of units now number of units kill a formula was annual production which is 30 000 units and in this sum entirely we are talking about months so it will be 30 000 divided by 12 because in a year there are 12 months so once you divide we get the number of units that's two thousand five hundred now remember in your entire sum the number of units will remain 2500 the rate will be taken from the cost structure and for the period we'll have to check the question okay so the format is there okay remember unit for the full sum is two and a half thousand rate comes from the cost structure and period will be there from the quest so let us start one by one first thing current asset we have stock of raw material now remember for stock of raw material the number of units that are required are 2500 the rate of raw material is rupees six and the period let us check for the period here I can see your material in hand it is raw material in hand is for two months so we will apply to the formula unit into rate into period so we get it as 2500 was the number of units the rate was 6 and the period is two months just that is it unit ticket from unit uh rate taken from the construction period from the question and just multiplied that's it that will be able to get each and every answer so 2500 uh eight to six into two will give you the value of 30 000 rupees that is the value of raw material now next under WIP we have three things raw material labor and over it for all the three again number of units remain 2500 for the rate raw material is six labor is one and overheads is two now for WIP a working process there will be various names given in the question okay they can give you in the form of uh what is uh you know processing period trade cycle period business period all those kind of stuffs here okay so let us see what is given here um yeah here they have given us production time in the question they're giving you production time is one month production time is nothing but working process so for all the three the period will be one month now the most important thing remember for labor and overheads under WIP whatever answer we will get will always have to take the half okay so raw material 2500 into 6 into 1 labor will be 2500 into one okay the value is fifteen thousand uh for labor 2500 into one uh into the period one and whatever answer you'll get we'll have to take half of that because I'll take it at 0.5 the value will come up to one two five zero for overheads again number of units is 2500 period the rate is two period is one and we always have to take the half of that so the value comes to five thousand next for finish Goods always remember finish Goods the rate is always taken on cost of production so number of units remains two and a half thousand uh cop is right and the time period for finish good in store is three months so we just multiply 2500 into 9 into 3 we get the value as 67 500. for letters we always take it on selling price unless mentioned in the question to take it on some other rate again 2500 selling price is ten debtors another name for debt is a customer so customers period is three months so it will be 2500 into 10 into 3 which comes to seventy five thousand cash is always given in the question so that is 40 000 so we'll go down that as forty thousand so with that all our assets our current assets are done so we add up the total current asset and we get the total as 2 lakh Thirty one thousand two hundred and sixty with this our first part of the sub is done now we jump to the second part that is current liability under which we have to first find the value of creditors now and now again credit a number of units is 2500 the rule was creditors are always taken on raw material which is rupees six so it will be 2500 into 6 into credit for material okay these are suppliers credit for material is two months so we will take this as 2500 into 6 into 2 which comes to thirty thousand outstanding if given now India just when they are giving you wages and overheads are paid in the beginning of next month for the current year current month wages and overheads are paid in the next month so there is a time lag of one month or outstanding of one month is available so the period is one month again 2500 into labor which is one Rupee into the outstanding period which is again one month which comes to 2500 no half here you don't have to take any half half is only in WIP over at 2500 into 2 into 1 which comes to 5000 we add up we get a total current liability as thirty seven thousand five hundred in the sum there is no margin of safety given so CA minus CL will be a final answer that will be our working capital so current asset minus current liability the value that we should have got would have been one lakh ninety three thousand seven hundred and fifty with this we were able to solve the problem sum based on working capital financing now the next thing what they have asked us to find is calculate the maximum permissible bank finance where they are given core current asset is 25 percent of total asset so that will be we'll keep that in mind because that will be useful remember one thing just note on the value of current asset and current liability somewhere because I'll be you know we'll need those two values in order to get the tendon Community Values okay so 231 250 CA 37 500 is the value of current liability now let us see how to find the maximum permissible limit number one the formula is the maximum permissible limit is 75 percent of current asset minus current liability so it is nothing but 75 of 2 lakh 31 250 that was the current assets minus current liability that was 37 500. we will subtract it whatever amount you get of that trend of that we have to take 75 percent and that amount will come to rupees 1 lakh 45 330. so this is the maximum limit which the bank can give you as a loan under the first method under the second method the formula is 75 of current asset minus current liability current asset was 2 like 31 250 to 75 percent of that whatever amount you get minus 37 500 so the value that girl should have got would have been you know 75 percent of two like 31 250 is one like seventy three thousand four thirty eight minus 37 500 will give you one lakh 35 938 rupees this is as for the second method as for the third method the formula is 75 percent of current asset minus core current asset now core current asset was remember in the question it was given as 25 of assets total asset is nothing but current asset okay current asset was 2 lakh 31 250 of that we'll have to take 25 percent okay so it will look something like this 830. we will subtract that multiply it by 75 percent whatever answer you get from that will have to minus the current liability so it comes to one lakh thirty thousand seven eighty minus 37 500 so our final value will be rupees 92 578. okay so that is the three maximum permissible Bank limit okay according to the method of tendon committee the first method second method and third method with this the entire sum based on working capital financing comes to win it we started off with the working nodes then we use that entire statement to get the working capital and from that we were able to get the maximum permissible buying Finance according to the trending committee okay this is like a full-fledged sum that has been completed okay so I hope everyone have understood the topic based on how to solve some uh based on working capital financing under the subject strategic financial management with that we will be ending this video here thank you