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Forecasting Techniques of Working Capital

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For calculating the forecasting of working capital requirements, some popular methods are discussed below:

  1. Cash Forecasting Method
  2. Balance Sheet Method
  3. Profit and Loss Adjustment Method
  4. Percentage of Sales Method
  5. Operational Cycle Method
  6. Regression Analysis Method
  1. Cash Forecasting Method:

In this cash forecasting method, the working capital is calculated by using the closing balance of the cash. In this case, consider the payments and receipts are made in the same period.

  1. Balance Sheet Method:

In the balance sheet method, the forecasting is madeon the basis of difference between assets and liabilities of the firm. This will show the cash surplus or cash deficiency of the organization.

  1. Profit and Loss Adjustment Method:

This method is used to determine the forecasted profit and loss statement of the firm. The cash loss will be adjusted with more cash supply.

  1. Percentage of Sales Method:

This method has simple procedures which are easy to understand.To determine the percentage of sales, the firm requires its past statistics of sales.

  1. Operational Cycle Method:

The total operational cycle of an organization consists of several processes. To calculate the operational cycle of an organization, the working capital of purchase of raw material to its conversion into cash is considered.

Each of this activity is evaluatedin terms ofnumbers of days and required amount of investment. The total of each stage of investment is the overall working capital of the firm.

To express the operating cycle of an organization, it is determined by using the formula:

T = (r – c) + w + f + b


T = Total period of operating cycle in number of days

r = Number of days of raw materials and the storage consumption requirement of raw materials

c = Total number of days of credit allowed by the creditors

w = Number of days of cost of production for work in progress

f = The finished stock storage period


T = Duration of operating cycle in total number of days

r = Raw materials and the storage period

c = creditors payment period

f = Finished stock storage period

w = Work in process period

b = Debtors collection period

  1. Regression Analysis Method:

In this method, statistical formula will be used to find out the value of estimated working capital. For this purpose, the average relationship of sales and working capital of the past years are established for the current assets.

Procedure of calculating the working capital:

Current Assets

Raw Material                                                              xx

Work in Progress                                                        xx

Finished Goods                                                            xx

Debtors’                                                                      xx

Cash                                                                            xx

Total Current Assets                                                   xx

Less: Current Liabilities

Creditors’                                                                    xx

Wages                                                                         xx

Any Other Expenses                                                    xx

Total Current Liabilities [TCA – TCL]                          xx

Working Capital                                                          xx

Add: Contingencies                                                     xx

Amount of Working Capital Required                                    xx



  1. For the computation of cost of all elements, we have to find out numbers of units.
  2. Computation of Finished Goods:

Raw Material Cost                              xx

Labour Cost                                         xx

Overhead Cost                                    xx

Finished Goods                                    xx

  1. As the work in progress and its finished goods remains the same, this means the production occurs uniformly throughout the year. In this case, we have to find out the value of work in progress separately.

Raw Material Cost                              xx

Labour Cost                                         xx

Overhead Cost                                    xx

Work in Progress                                xx

Hence, the value of debtors will be calculated. This value either include profit element or not for the calculation process.

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