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
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.
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.
|Gross working capital requirement||31,500||17.2%|
|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).