Meaning of Working Capital Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets. Managing working capitaRead more
Meaning of Working Capital
Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets.
Managing working capital is a crucial process to maintain short term liquidity and so ultimately resulting into achieving long term objectives efficiently. Working capital can be calculated by deducting business’s current liabilities from current assets.
To achieve the ideal working capital requirement for any business, it is important to understand various types of working capital and various ways to manage it.
Coming to Permanent Working Capital, also called as Fixed Working Capital, it is the minimum working capital required or maintained by businesses. Such type of working capital is maintained to take care of regular financial obligations like creditors, inventory, salaries etc.
Irrespective of scale of operations carried out in business, Permanent Capital is maintained by businesses which can be in form of Net Working Capital.
There is no specific formula for calculating Fixed Working Capital, it completely depends upon the business’s assets and liabilities. So accordingly, it can be estimated through the balance sheet of the business.
For calculating Permanent Working Capital, you can follow below steps:
Calculate Net Working Capital for each day for a whole month
Find the smallest value among them
That will be Permanent Working Capital for the month
Follow the above steps for every month
There you have the annual figure for Permanent Working Capital
The requirement of Permanent Working Capital changes as the business expands. It is crucial to make sure that the working capital level does not fall below the Permanent Working Capital requirement.
Types of Permanent Working Capital:
Permanent working capital is further divided into two types:
Regular working capital – This refers to capital required to maintain healthy cashflow for purchases of raw materials, payment of wages etc.
Reserve working capital – This refers to amount which is more than regular working capital to take care of unexpected business expenses due to contingent events.
Before we jump in the concept of valuation of Goodwill, let us first understand the meaning of term “Goodwill”. Goodwill is an Intangible asset of the business. As the definition of Intangible asset, Goodwill cannot be seen or felt. In simple words it is business’s worth or its reputation earned oveRead more
Before we jump in the concept of valuation of Goodwill, let us first understand the meaning of term “Goodwill”.
Goodwill is an Intangible asset of the business. As the definition of Intangible asset, Goodwill cannot be seen or felt. In simple words it is business’s worth or its reputation earned over a period of time.
Calculation of value of the goodwill in monetary terms is done at the time of merger or acquisition of the business. Goodwill is often applied to businesses which are earning large number of profits, have crucial corporate links and large customer/client base.
Self-earned goodwill is never shown in monetary terms in business’s own balance sheet while goodwill which is purchased is shown in the asset side of the balance sheet of the buyer business.
Following are the methods under which goodwill can be valued:
Average Profit Method – In this method, Goodwill is calculated by average profits multiplied by the number of years purchased. Typically, last 5-6 years profit figures are taken ignoring any abnormal gains or loss during the year. Formula for the same would be as follows:
Goodwill = Average Profit x No. of Years Purchase
Weighted Average Method – This method is updated method of average profit method, Profits of the previous years are calculated by specific number of weights. This method is useful when there is a lot of fluctuations in the profits and importance has to be given to current year’s profit. Formula for the same would be as follows:
Goodwill = Weighted Average Profit x No. of Years Purchase
Where,
Weighted Average Profit = Sum of Profits multiplied by weights / Sum of Weights
Super Profit Method – Super profit is additional profit generated by the business over normal profit. Further for the calculation, Super profit is capitalized by the normal rate of return and resulting figure is value of Goodwill.
Formula for the same would be as follows:
Goodwill = Super Profits x (100/Normal Rate of Return)
Annuity Method – In this method, Discounted amount of the super profits is calculated by taking into consideration the current value of the annuity at rate of return.
Formula for the same would be as follows:
Goodwill = Super Profit x Discounting Factor
Capitalization Method – In this method, existing capital employed is deducted from capitalized number of average profits or super profits. The resulting figure is Goodwill.
Formula for the same would be as follows:
a. Average Profit Capitalization Method –
Goodwill = [Average Profit / Normal Rate of Return x 100] – Capital Employed
b. Super Profit Capitalization Method –
Goodwill = Super Profits x (100/ Normal Rate of Return)
Meaning New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit. Thus, New pRead more
Meaning
New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit.
Thus, New profit-sharing ratio can be stated as ratio in which all the partners, Old and New will share profits and losses of the partnership in future. The new profit-sharing ratio can be calculated as follows.
Formula
Sacrifice ratio is the ratio in which old/existing partners agrees to give away their share in profits for the new partner.
For better understanding let’s see how calculation of New profit-sharing ratio can be done:
Example : There are two partners in a partnership firm, Mr. Anil & Mr. Mukesh. Their profit-sharing ratio is 2:3. They wants to admit Mr. Nikhil as their third partner for 1/3rd share.
In such case, Calculation of New profit-sharing ratio would be as follows:
Total profit = 1
Mr. Nikhil’s Share = 1/3
Remaining Profit = 1 – 1/3 = 2/3
So, this remaining share of 2/3 is shared among the old partners in their old ratio of 2:3.
Mr. Anil’s Share = 2/3 x 2/5 = 4/15
Mr. Mukesh’s Share = 2/3 x 3/5 = 6/15
Mr. Nikhil’s Share = 1/3 x 5/5 =5/15
So, New ratio would be 4/15: 6/15: 5/15 i.e., 6:4:5
What is permanent working capital?
Meaning of Working Capital Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets. Managing working capitaRead more
Meaning of Working Capital
Firstly, let’s understand the meaning of the working capital. Working capital is the factor which demonstrates the liquidity position of the business to carry out day to day operations. It majorly includes cash & bank balances and liquid assets.
Managing working capital is a crucial process to maintain short term liquidity and so ultimately resulting into achieving long term objectives efficiently. Working capital can be calculated by deducting business’s current liabilities from current assets.
To achieve the ideal working capital requirement for any business, it is important to understand various types of working capital and various ways to manage it.
Coming to Permanent Working Capital, also called as Fixed Working Capital, it is the minimum working capital required or maintained by businesses. Such type of working capital is maintained to take care of regular financial obligations like creditors, inventory, salaries etc.
Irrespective of scale of operations carried out in business, Permanent Capital is maintained by businesses which can be in form of Net Working Capital.
There is no specific formula for calculating Fixed Working Capital, it completely depends upon the business’s assets and liabilities. So accordingly, it can be estimated through the balance sheet of the business.
For calculating Permanent Working Capital, you can follow below steps:
The requirement of Permanent Working Capital changes as the business expands. It is crucial to make sure that the working capital level does not fall below the Permanent Working Capital requirement.
Types of Permanent Working Capital:
Permanent working capital is further divided into two types:
- Regular working capital – This refers to capital required to maintain healthy cashflow for purchases of raw materials, payment of wages etc.
- Reserve working capital – This refers to amount which is more than regular working capital to take care of unexpected business expenses due to contingent events.
See lessHow to do Valuation of Goodwill?
Before we jump in the concept of valuation of Goodwill, let us first understand the meaning of term “Goodwill”. Goodwill is an Intangible asset of the business. As the definition of Intangible asset, Goodwill cannot be seen or felt. In simple words it is business’s worth or its reputation earned oveRead more
Before we jump in the concept of valuation of Goodwill, let us first understand the meaning of term “Goodwill”.
Goodwill is an Intangible asset of the business. As the definition of Intangible asset, Goodwill cannot be seen or felt. In simple words it is business’s worth or its reputation earned over a period of time.
Calculation of value of the goodwill in monetary terms is done at the time of merger or acquisition of the business. Goodwill is often applied to businesses which are earning large number of profits, have crucial corporate links and large customer/client base.
Self-earned goodwill is never shown in monetary terms in business’s own balance sheet while goodwill which is purchased is shown in the asset side of the balance sheet of the buyer business.
Following are the methods under which goodwill can be valued:
Goodwill = Average Profit x No. of Years Purchase
Goodwill = Weighted Average Profit x No. of Years Purchase
Where,
Weighted Average Profit = Sum of Profits multiplied by weights / Sum of Weights
Formula for the same would be as follows:
Goodwill = Super Profits x (100/Normal Rate of Return)
Formula for the same would be as follows:
Goodwill = Super Profit x Discounting Factor
Formula for the same would be as follows:
a. Average Profit Capitalization Method –
Goodwill = [Average Profit / Normal Rate of Return x 100] – Capital Employed
b. Super Profit Capitalization Method –
Goodwill = Super Profits x (100/ Normal Rate of Return)
See lessWhat is the formula for new profit sharing ratio?
Meaning New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit. Thus, New pRead more
Meaning
New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit.
Thus, New profit-sharing ratio can be stated as ratio in which all the partners, Old and New will share profits and losses of the partnership in future. The new profit-sharing ratio can be calculated as follows.
Formula
Sacrifice ratio is the ratio in which old/existing partners agrees to give away their share in profits for the new partner.
For better understanding let’s see how calculation of New profit-sharing ratio can be done:
Example : There are two partners in a partnership firm, Mr. Anil & Mr. Mukesh. Their profit-sharing ratio is 2:3. They wants to admit Mr. Nikhil as their third partner for 1/3rd share.
In such case, Calculation of New profit-sharing ratio would be as follows:
Total profit = 1
Mr. Nikhil’s Share = 1/3
Remaining Profit = 1 – 1/3 = 2/3
So, this remaining share of 2/3 is shared among the old partners in their old ratio of 2:3.
Mr. Anil’s Share = 2/3 x 2/5 = 4/15
Mr. Mukesh’s Share = 2/3 x 3/5 = 6/15
Mr. Nikhil’s Share = 1/3 x 5/5 =5/15
So, New ratio would be 4/15: 6/15: 5/15 i.e., 6:4:5
See less