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Chapter 7

4.4 Working capital investment levels

The working capital ratios formulae can be rearranged so that instead of calculating
the number of days they can be used to predict future (or calculate current) levels of
investment (the SFP figure).

For instance to calculate a trade receivables balance:
Trade receivables days
= ––––––––––––––––––– × credit sales
365

Question 5

Working capital investment

A company has the following expectations for the forthcoming period:

Sales $30m

Materials costs $20m

Other costs $4m

Profit $6m

The following working capital ratios are expected to apply:

Inventory days 45

Receivables days 65

Payables days 35

Calculate the working capital requirement.

Days = SFP figure/SPL figure × 365

SFP figure = Days × SPL figure/365

Inventory = 45 × $20m/365 = $2.47m

Receivables = 65 × $30m/365 = $5.34m

Payables = 35 × $20m/365 = $1.92m

Working capital required = $2.47m + $5.34m – $1.92m = $5.89m

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