Needs are simply the differences between your current achievements and your desired accomplishments.
Needs assessments can be a systematic process to guide decision making. •Needs assessments can provide justification for decisions before they are made. •Needs assessments can be scalable for any size project, time frame, or budget. •Needs assessments can offer a replicable model that can be applied by novices or experts. •Needs assessments can provide a systemic perspective for decision makers •Needs assessments can allow for interdisciplinary solutions to complex problems
Scope of Financial Needs Assessment:
We can break down decisions into three levels:
• Strategic : typically involves financial goals, objectives, and strategic policies defining the relationship between organizations and the society they serve
• Tactical : includes the financial policies and procedures put in place to both support strategic decisions and guide operational decisions, thereby defining the goals and objectives of an organization or institution
• Operational : includes all sorts of short- and long-term financial decisions that typically involve implementing projects or programs and carrying out tasks to produce results
Estimating Working Capital Requirement : There are broadly three methods of estimating or analysing the requirement of working capital 1.Percentage of revenue or sales, 2.Regression analysis 3.Operating cycle method.
Estimating working capital means calculating future working capital. It should be as accurate as possible because the planning of working capital would be based on these estimates and bank and other financial institutes finance the working capital needs to be based on such estimates only.
1. Percentage of revenue or sales,
It is the easiest of the methods for calculating the working capital requirement of a company. This method is based on the principle of ‘history repeats itself’. For estimating, a relationship of sales and working capital is worked out for say last 5 years. If it is constantly coming near say 40% i.e. working capital level is 40% of sales, the next year estimation is done based on this estimate. If the expected sales are 500 million rupees, 200 million rupees would be required as working capital.
2. Regression analysis
This statistical estimation tool is utilized by mass for various types of estimation. It tries to establish trend relationship. We will use it for working capital estimation. This method expresses the relationship between revenue & working capital in the form of an equation (Working Capital = Intercept + Slope * Revenue). The slope is the rate of change of working capital with one unit change in revenue. Intercept is the point where regression line and working capital axis meets (Will not go deeper into statistical details). At the end of the statistical exercise with past revenue and working capital data, we will get an equation like below:
Working Capital = -6.34 + 0.46 * Revenue
3. Operating cycle method.
This is probably the best of the methods because it takes into account the actual business or industry situation into consideration while giving an estimate of working capital. A general rule can be stated in this method. Longer the working capital operating cycle, higher would be the requirement of working capital and vice versa. We would agree to the point also. The following formula can be used to estimate or calculate the working capital
Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365 Days) + Bank and Cash Balance.
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Project Planning and Management Study notes for M. plan Sem-II
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