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Working capital management

Question 4

Working capital ratios

A company has the following figures from its most recent accounts:

Receivables $295,000

Trade payables $120,000

Inventory (raw materials) $45,000

Inventory (WIP) $25,000

Inventory (finished goods) $66,000

Sales (100% on credit) $1,631,000

Gross profit margin $30% on sales value

Raw materials purchases 90% of cost of sales value
Calculate the cash operating cycle. Assume 365 days in a year and round
calculations to the nearest day.

Cost of sale = 70% of sales = $1,631,000 × 70% = $1,141,700

Raw materials purchases = $1,141,700 × 90% = $1,027,530

Raw material inventory holding period: $45,000/$1,027,530 × 365 = 16 days

WIP inventory holding period: $25,000/$1,141,700 × 365 = 8 days

Finished goods inventory holding period: $66,000/$1,141,700 × 365 = 21 days

Receivables days: $295,000/$1,631,000 × 365 = 66 days

Payables days: $120,000/$1,027,530 × 365 = 43 days

Cash operating cycle = 16 + 8 + 21 + 66 – 43 = 68 days.

Illustrations and further practice

Now work through the various parts of Illustration 1 and try TYU questions 2
and 3 from Chapter 7.

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