Normative working capital
|There are several approaches of the working capital requirement (WCR) and several methods to calculate it:
It is possible that the date of exercise, so when the "snapshot" of the balance sheet is made, is not representative of the average activity of the company.
The normative Working Capital Requirement
Example: Company Bliss with:
Calculation:Weighting of receivables : 8 x 1,196 (VAT) / 8 = 1,196
Weighting of inventories : 4 / 8 = 0,50
Weighting of suppliers debt for raw material purshases : 4 x 1,196 / 8 = 0,6
Weighting of other purshases : 1 x 1,196 / 8 = 0,15
The normative Working Capital Requirement represents 55,3 days of sales, which mean a value of 1212 K€ (55,3 / 365 x 8 M€).
It is necessary to control and anticipate changes in working capital in value and in proportion with the turnover. Monthly monitoring on both aspects of the WCR is essential to evaluate the improvement or regression of working capital management.
The advantage of the normative working capital is to assess the need for future financing of the operation based on forecasts of revenue. This is a management tool for business growth very relevant!
To go beyond the mere observation of the value of working capital, it must be analyzed and dissected in detail to determine its main components, which depend on the activity and organization of the company. This study is necessary to prioritize action plans on the most important process.
For example, in some companies the focus is on improving the collection of receivables when others streamline their procurement process to reduce their inventories.
Next (Drive the Working Capital)
Excel tool which allows to calculate the normative WCR and to determine what will be the WCR with the evolution of the turnover of your company.
Ovi Sicwetsha - 23/01/2018
This is useful.
sherjeel - 08/05/2017
Its good to have such a nice tool.
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