Have you ever been in a situation where you need to know the
cash impact of a new customer, or an additional product range from a new
supplier, or for that matter how a bid would create cash.
Working capital per $ of revenue
could be most helpful in these cases.
Step 1 Calculate your average working capital per $ of
revenue (WC/$) (see example below)
Step 2 Multiply your revenue with the (WC/$), adjust for the
time period if less than a year. = Total working capital retention at the end
of the period
Step 3 = Take your gross profit contribution and deduct your
working capital requirement this is the cash impact due to the transaction as
at the end of the period.
Hope this helps
Working Capital per $
of revenue
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20.55
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(j) = (g/ixh)/a)*100
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Working capital
(adjusted for the revenue period divided by revenue x 100)
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Sales/Revenue
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3,000,000
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(a)
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COGS
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2,500,000
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(b)
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Gross profit
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500,000
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(c )
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Gross profit %
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17%
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Days
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Accounts receivable
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600,000
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(d)
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36
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Inventory
|
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840,000
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( e)
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60
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Accounts payable
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190,000
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(f)
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14
|
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Working Capital
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1,250,000
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(g)= (d+e-f)
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Working Capital per $
sales
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20.55
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Days in period
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180
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(h)
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Days in year
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365
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(i)
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Per the above example
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Revenue (sales)
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3,000,000
|
|
|
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Working Capital per $
revenue
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20.55
|
|
|
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Required working
capital
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1,250,000
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Profit contribution
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500,000
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Cash required to fund first 180 days
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750,000
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Step-3 is helpful , because.Gross capital -working capital requirement can give you accurate answer.
ReplyDeleteInvoice Template
Hi Ruby
Deletethanks for your comment. yes i agree its a great way to shotcut the way you determine the casg requirement.