A-z of working capital

Cost Accounts 214 views 3 replies

Hi,

We know there are 8 types of working capitals and five of them are main namely: 

Gross working capital = current assets

Net working capital = Current assets - Current liabilities

Fixed working capital = ??

Temporary working capital = Net working capital - Fixed or permanent working capital.

Seasonal working capital = Fixed working capital + Additional working capital needs.

Regular working capital = ??

There are different methods to assess working capital needs like 

a. % of sales method = Networking capital / Revenue *100

b. Regression method

c. Operating cycle method = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365 Days) + Bank and Cash Balance.

d. Net working capital requirement rate =

Accounts receivable = Days credit x Daily revenue
Accounts receivable = 45 x 182,500 / 365
Accounts receivable = 22,500
Accounts receivable % = 22,500 / 182,500 = 12.3% the business needs 12.3% of revenue Working capital as a result of giving credit

Then

Inventory = Days inventory x Daily cost of sales (Rev * (1-Gross margin)
Inventory = Days inventory x Daily revenue x (1 - Gross margin %)
Inventory = 30 x (182,500 / 365) x (1 - 40%)
Inventory = 9,000
Inventory % = 9,000 / 182,500 = 4.9% here the business needs WC of 4.9% of revenue as a result of taking credit.

Then

Accounts payable = Days credit x Daily cost of sales
Accounts payable = Days credit x Daily revenue x (1 - Gross margin %)
Accounts payable = 20 x (182,500 / 365) x (1 - 40%)
Accounts payable = 6,000
Accounts payable % = 6,000 / 182,500 = 3.3% here business needs WC of 3.3% of revenue as a result of taking credit. 

Got it right? 

Working capital requirement rate = Inventory + Receivables - Payables.

Days Amount % Revenue
Accounts receivable 45 22,500 12.3%
Inventory 30 9,000 4.9%
Gross working capital requirement   31,500 17.2%
Accounts payable 20 6,000 3.3%
Net working capital requirement   25,500 13.9%

Based on this information, the net working capital funding required is 13.9% of revenue. If the company gets a new project worth 100$, then multiply it with 13.9% and you would need that amount of funding the operation. This last method is adequate because if we substitute any of the above 4 a,b,c,d working capital assessments into the Permanent or fixed working capital and also into regular working capital, there is no guarantee that 

100*13.9% = Net working capital - Fixed working capital (Temporary working capital).

Txs. 

Replies (3)
What is your query?
This is a basis of Working capital calculation.

Yes. Ive done a basic research after posting this and none of the working capital formulas give the same results. But % sales method gives exactly the same amount of NET WORKING CAPITAL. This other method 'd' is giving lower amount than net working capital requirement. Any idea what is wrong with it. Even regression analysis if i do will inflate or deflate it. 

However i can understand net working capital is just the difference between the current assets and liabilities and does not deal with net cash operating cycle like 'd' does. Then why did 'a' give me the difference rather than the amount required? I don't have time to do many math's so i left it off. Otherwise i would have found out why A assessment has something to do with just giving a difference which shows if assets are higher than liabilities rather than how much cash i need for the next production cycle. Is there anything like that in costing, not that I know of? 


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