Q. Working Capital as a Percentage of Total Assets?

This approach of estimation of working capital requirement is based on the fact that the total assets of the firm arc consisting of fixed assets and current assets. On the basis of past experience, a relationship between

i) total current assets Le., gross working capital; or net working capital, Le., Current assets Current liabilities, and

ii) Total fixed assets or total assets of the firm are established. For example, a firm is maintaining 20% of its total assets in the form of current assets and expects to have total assets of Rs. 50, 00,000 next year. Thus, the current assets of the firm would be Rs. 1000000 (i.e., 20% of Rs. 5000000). .

In this approach, the working capital may also be estimated as a% of fixed assets. The firm basically plans the future level of fixed assets in terms of capital budgeting decisions. In order to use these fixed assets in an efficient and optimal way, the firm must have sufficient working capi¬tal. So, the working capital requirement depends upon the planned level of fixed assets.