Working Capital Analysis


3)Working Capital
: Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations. The concept of this decision focuses on if it is possible to maintain enough capital for payments of its bills including and extra money earned as interest. Current assets and current liabilities are considered as the part of this decision.

For any business stablishing the proper working capital management is critical. Having inappropriate working capital management can lead to bad operational business. Part of a management team in a company is to make business estimations in regards the company’s future expected sales as well as costs. This is done to better understand the requirements of the company’s future working capital. In additional, this provides management some guidelines on how to raise the appropriate funds at the appropriate time without having to interrupt any business operations.

Abstract : Analysis of financial statement of a company is an important because it is useful to obtain Information

Working capital is the key to a successful business. It is like their blood flow and the manager’s job is to help keep it flowing. Under the Generally Accepted Accounting Principles working capital is simply the difference between a company’s Current Assets, which are cash, inventory, accounts receivable and prepaid items, and Current Liabilities, accounts payable and accrued expenses.

George 's Train Shop is a family owned business that focuses on the sales and repairs of train toys. George is running a profitable business, but as he is aware of my MBA Managerial Finance class, he has asked for advice on his working capital practices. Although George is currently enjoying the benefits of a profitable business, there are opportunities for him to expand his business ventures. This first starts by dissecting degree of aggressiveness in working capital practices, current capital budgeting practices, and areas where he can improve in both arenas. In addition, careful management of the company 's cash flow will

The Working Capital measures both the company’s effectiveness and it’s immediate financial health. The working capital ration is calculated by subtracting the current assets from the current liabilities. The Working Capital for my company is $-17,210. A positive working capital means that the company will be able to pay its short-term liabilities. A negative working capital means a company can not pay its short-term liabilities.

Capital budgeting is a long-term schedule that decides what investment projects to choose. When an option is selected, a company decides where and how to obtain the funds to support its investment and a way of determining the capital structure. A company should make sure it has access to working capital to maintain it operations daily. If this is not available, the company will not be able to maintain it daily operation until

In order to evaluate company’s operational strength and weaknesses accurately it is important to have access to more than one year worth of data. The company, of course, will not be evaluated on the basis of couple of ratios, it is very important to analyze all the available information to put pieces of puzzle together to see the overall impression of the company and its attractiveness to creditors, investors and stockholders.

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Financing requirements of the company can be determined by calculating the cash requirements of the company by adding the working capital needs and capital expenditure needs of the company. Working capital needs can be calculated by subtracting current liabilities from current assets of the company. Current assets of the company will remain significantly lower than current liabilities for next three years. Working capital needs of the company come out to be $17.523 million, $21,028 million and $21,028 million for years 2010, 2011 and 2012. Capital expenditures of the company will remain at $0.9 million for all three years. Adding the values of working capital needs and capital expenditure needs for all years and by subtracting these values from net income, we can calculate the external financing required by the company to meet the cash needs for next three years. As shown in calculations in excel sheet, external financing requirements for the company come out to be $15.231 million for 2010 and $18.091 million for 2011 and 2012 respectively.

SNC wants to build off the momentum gained in phase 2 by further expanding their brand to reach the international markets. Mega –Mart has helped SNC become a national household name, so we would like to become an international competitor. Applying a global strategy will increase our revenue and our EBIT and allow us to keep our costs flat by contracting with international suppliers. At this stage in our business cycle, we are interested in maintaining steady growth, retaining as much of our earnings as possible and paying down our credit lines to lower our interest expense.

* We assumed the required working capital in table 2 and 3 is the amount required in 2010, for further years we computed the WCR based on the ratio’s of minimum cash balance, number of days sales outstanding, inventory turnover and days payable outstanding (deducting the depreciation as instructed)

Analysing the historical values of the operating margins from the Income Statement, we forecast values for the 2007-2009 period. The executives of BKI expect the firm to achieve operating margins at least as high as the historical ones. Thus, we took averages and slightly adjusted them toward higher values. Since the declining tendency in the last three years was cause by integration costs and inventory write-downs associated with acquisitions, which already have been completed. To the EBIT, estimated by using those margins, subtract the taxes, Capex, adjust for Depreciation, Amortization and change in Working capital. The capital expenditures were just over $10m on average per year. The company is expecting the Capex remain modest. Thus, we assumed a Capex of $10m for the next three years. We estimated Net Working Capital by using the average ratio of NWC/Net income of the last three years.

The new project requires an increase in inventories in year 0 and year 3. This will change the net working capital. It will represent an outflow for year 0 and 3, and an inflow when the project terminates because we will recover it.

As a shrewd financial analyst you observe that the net working capital of the firm has typically been about 20% of the annual revenues. How would you incorporate this observation into the analysis?