A-z of working capital

Yasaswi Gomes (1424 Points)

06 December 2022  

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.