Working Capital As A Function Of Sales

1658 WordsApr 25, 20167 Pages
Working Capital (WC) can be defined in different ways: a) the difference between current assets and current liabilities [Preve & Sarria-Allende, 2010]; b) as a ratio Current Assets/Current Liabilities [de Jaime Eslava, 2010] c) as a measure of operating days [Filbeck, and Krueger, 2005], etcetera. However, we will consider the concept of Net Working Capital as a function of sales [Hill et al, 2010; Aktas et al., 2014]: NWC=(Accounts Receivable)/Sales+Inventory/Sales-(Accounts Payable)/Sales The principal measures of working capital are summarized in Table 1. Table 1. Working Capital Measures and Components Component Equation Meaning Working Capital Current Assets – Current Liabilities Measure of company’s efficiency and short term financial health. It indicates if the company has enough short term assets to cover its current debt [Preve & Sarria-Allende, 2010]. Current Ratio or Working Capital ratio Current Assets / Current Liabilities Measure of the company ability to pay short term debt [de Jaime Eslava, 2010]. Net Working Capital [(Receivables / Sales) + (Inventory / Sales) – (Payables / Sales)] Measure of cash flow and the ability to serve debt as a percentage of sales. Cash Conversion Efficiency (Cash Flow from Operations) / Sales Measures the percentage of sales converted in cash or how well a company transforms sales revenues in cash [Filbeck, and Krueger, 2005] Days Working Capital (Receivables + Inventory – Payables) / (Sales / 365) Represents the time
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