Financial Edge - Working Capital Flashcards
What is the timeframe of current assets and liabilities?
Less than 1 year
What are assets?
Provide future benefit to a business
What are liabilities?
Future obligation of the business
Difference between working capital and operating working capital?
OWC only includes operating assets and liabilities; ignores things such as cash and financial assets, financial debt, etc
What does positive operating working capital mean?
Current operational assets is greater than current operational liabilities. However, this means that the company requires funding, as it is taking longer to receive money from customers than they are taking to pay suppliers
Define operating working capital?
Includes current assets and current liabilities that are operating in nature
What does operating working capital measure?
Funds needed to maintain operations
If you have positive OWC, you have more cash tied up in operations than you have currently received from suppliers, so you need to fund the additional cash from somewhere.
What is more preferable: positive OWC or negative OWC?
Negative OWC, as positive OWC requires that funds are invested from stakeholders in order to maintain operations
When considering FCF, do you care about nominal levels of NWC, or changes in NWC?
Changes - that shows the change in cash needed to fund the business
Why do we use the concept of days in working capital?
Helps tell us how long cash is tied up for in the business
How do you calculate receivables days?
Ending receivables / Sales * 365
How do you calculate payables days?
Ending payables / COGS * 365
How do you calculate inventory days?
Ending inventory / COGS * 365
Would you use ending or average balances to work out days outstanding in working capital calculations?
Can use either, but usually use ending when forecasting and average when doing credit analysis
How do work out the operating cash cycle?
Inventory days + Receivables days - Payables days
