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There is no exact way to calculate working capital requirement. However, it can be estimated. It can be estimated on the basis of existing and projected financial statements and on the basis of cash conversion cycle.
Cash conversion cycle show you number of days in which cash of the business remain block in stock, finished goods, receivables. The bank is to cover this gap through working capital loan
If it is an existing company we take last year/Qtr, P&L & B/S and based on the expenses and overheads and the new projects and products if any, increase/decrease of the manpower and other overheads, cost of raw material and the profit that we expect from the new project the working capital can be assessed. If it is startup company the cost of the project and expecting profit after expenses will play vital role.
Working Capital is the difference between Current Assets (Inventory, Receivables, Cash, cash and cash equivalent) and Current Liabilities (Creditors/Payables, Short-term borrowings, Taxes). The difference is the Working Capital available to the company (if positive) or the Workinga Capital Gap (if negative)
When a business trades, it buys goods from suppliers, holds them as inventory, and then sells them to customers. Depending on the type of business, there may be stages in between for example, a manufacturer will buy and hold inventory of raw materials, and incur production costs to manufacture the finished product before selling, whereas a retailer might simply buy from the supplier and sell on to the customer. Either way, the fundamentals are the same, buy from the supplier, hold inventory, and sell to the customer.
The amount of finance a business needed to carry out this day to day trading activity is referred to as the working capital requirement, and varies from industry to industry depending on the amount of time the business takes to pay suppliers, the amount of inventory held, and the time it takes to collect cash from customers.
