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Working Capital Calculation Exercises

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16 views3 pages

Working Capital Calculation Exercises

Uploaded by

leireperezdeituarte
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

CHAPTER 5

FINANCING BUSINESS DECISIONS


EXERCISE 1
The controller of J & B, Ld., Mr. Topson would like to propose in the next Council meeting a
rise of capital as one of the possible ways to increase the forecast of the working capital for
the next financial year and reached 6,000,000€. This number will allow the company to have
a degree of robustness comparable to other competitive companies in the industry.

Daily amount Average deferments (days)


Raw materials 60,000 10
Salaries 150,000 Seven
Overhead 90,000 ?

If the operating cycle is 30 days, what should Mr. Topson answer if a director asks him about
the average deferment of the overheads?

EXERCISE 2
Two friends founded a company dedicated to serve meals to schools. With this objective, they
contributed together with 150,000€, of which 6,000 were allocated to cover the initial costs of
foundation (notary, registration, licenses, etc.), 72,000 € to the acquisition of equipment
(cooking, refrigerators, dishwashers, etc.) and 72,000€ more to the purchase of vehicles
(necessary for provisioning and distribution). They want to depreciate all these expenses
(150,000 € in total) in ten years, depreciating each year the same amount (15,000 € / year).

Other expenses incurred by the partners are:


 7,200€ / year for the local rental. They are paid in 12 equal monthly fees at the end of each
 month.
  4.800 € / month for staff costs, which are paid weekly.
 12,000€ / month, for procurement of raw materials (meat, vegetables, etc.) to be paid
 within 60 days.
  480 € / month for water, gas and electricity. It is paid every two months.
 360 € / month for general administrative expenses, which are paid at the end of the month.

The revenues that the company has are from contracts with schools. Such contracts are
established by annual budgets and paid at the end of each quarter and amounted 78,000 €.

Knowing the above data and assuming it is not necessary to consider any other costs (taxes,
interest, social security, etc.) is asked:
a) Determine the annual profit.
b) Determine which must be its working capital

EXERCISE 3
The following data is from an industrial company:

- Monthly consumption of raw materials 15,000€. Two months deferral to suppliers.


- Monthly labor 18,000€, payment deferment equal to 15 days.
- Other operating expenses rise to 24,000€ each month, and on average are paid within one
month.

What should be its working capital necessary to allow funding their operating cycle knowing
that the Average Maturity Period of is 4 months?
EXERCISE 4
Calculate the necessary working capital in a company whose operating cycle gives six rotations
per year. It is known that the daily consumption of raw materials is 200 €, wages are 150 € each
day and the average overhead per week is 1.750 €. It is also known that the providers have
given the company a deferment of 90 days, the employees they are paid weekly, and
overheads are paid each 2 weeks.

EXERCISE 5
A company is dedicated to the construction and operation of tourist apartments. Its total assets
amount 1 million € from which 60% are owner’s equity, consisting of 60,000 shares and 40%
borrowed funds, for which it pays an interest rate of 14%. This year its assets contributed to
make sales of 1.75 million €, which means that after deducting the operating costs the income is
of 250,000€. After saving the appropriate amount to pay taxes, which are at 35%, 70% has
been paid as dividends.

We want to know:
a) Economic profitability and financial profitability or Return On Equity.
b) Return on sales volume and rotation of total resources.
c) Profitability for shareholders.

EXERCISE 6
A company dedicated to manufacture equipment for offices, has an operating cycle that lasts 90
days. Every 30 days will accumulate costs of 360,000€, which 60% is raw materials, 30% labor
and 10% for overhead. The delays in payments are for labor 30 days, for raw materials 60 days,
and for overheads 15 days.

You want to know the working capital that the company needs for the labor payment if they want
to keep a safety margin of 10%

EXERCISE 7
A company consumed daily 800 units of raw materials, the average price per unit equal to 6 €. It
has a staff of 30 men, who work an average of 6 hrs/day during the week. The daily overhead is
20 spending units with a unit price of 3 €.

It is known that the only supplier that supplies the company granted a deferment of payment of
30 days. The workforce perceives a weekly salary, with the price/hour/man of 6€. The deferral
of payment of overheads is 20 days.

From the accountancy books, we have the following information:


- The raw materials store records 10 rotations per year.
- The stock of the work-in-progress and finished goods recorded an average value during the
financial year 12,000 and 30,000 € respectively.
- The balance of the customer’s account is renewed on average every two months.
- The annual value of the work-in-progress and finished products are 240,000 and 300,000 €
respectively.

Determine the working capital of the company.

EXERCISE 8
Company X is dedicated to clean offices for fixed customers, which provides an annual income
of 216,000 €, which are made effective in four equal parts at the end of each trimester.

To carry on the business, company X has direct workers that are paid 7.200 € at the end of
each month; a personal vehicle driver who is paid 720€ each week and an office personnel paid
each month 2400 €

Other company costs are:


- 60 € every three days, the amount of fuel for their vehicles. It is paid in cash.

- 300€ monthly for materials and cleaning tools. The company makes the corresponding
purchases each quarter and pay within 60 days.
- 1,800 € monthly for renting its offices, warehouses and garage. Paid at the end of each
month.

Calculate the working capital.


(Consider all months of 30 days and 4 weeks).

Common questions

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The impact is measured by aligning income receipts (e.g., 216,000€ annually from customers) against deferred payment schedules (rent and payroll monthly, raw materials quarterly), affecting liquidity and operative cash reserves needed to manage overhead obligations continuously .

Calculate daily raw material costs (800 units x 6€ = 4,800€), consider payment deferment (30 days), and inventory turns (10/year, implying a 36-day stock duration). This involves managing cash flow to fund daily operations over the deferment period while maintaining necessary inventory levels .

When calculating the necessary working capital, consider the monthly consumption of raw materials (15,000€), monthly labor costs (18,000€), and other operating expenses (24,000€). The deferment periods are two months for materials, 15 days for labor, and one month for other expenses. The working capital required would ensure funding for the operating cycle and keep cash flow positive during the four months, aligning with the maturity period .

To find the average deferment period for overhead expenses, considering the operating cycle is 30 days, you can use the formula: Operating Cycle = Average Payment Period for Materials + Average Payment Period for Salaries + Average Payment Period for Overheads. Given the payment deferments for materials (10 days) and salaries (7 days), the deferment period for overheads would be 30 - (10 + 7) = 13 days .

To calculate working capital, identify all cash inflows (e.g., quarterly revenues, totalling 312,000€ annually) and outflows (monthly rentals, payroll, raw materials with 60-day deferments, utilities, etc.). Align this with the payment structure, ensuring capital availability to meet obligations .

First, calculate annual profit by subtracting total annual expenses from total revenues: Total revenues are 78,000€ x 4 (quarters) = 312,000€. Expenses include: Depreciation (15,000€/year), Local rental (7,200€/year), Staff costs (4,800€/month x 12), Raw materials (12,000€/month x 12), Utilities (480€/month x 6 payments), Administrative expenses (360€/month x 12). Subtract these from revenues to find profit. Working capital is determined by current assets minus current liabilities, considering payment deferments .

Economic profitability is calculated as Net Income divided by Total Assets. Financial profitability (Return on Equity) is Net Income divided by Owner's Equity. If total assets are 1 million €, owner's equity is 60% and borrowed funds 40% of assets, with a 14% interest rate on borrowed funds, and sales amount to 1.75 million € with a net income post-tax of 250,000€, deductions are applied to find the exact figures for profitability calculations .

Sales volume return is calculated as Net Income divided by Sales. Resource rotation is determined using Sales / Total Assets. Shareholder profitability includes dividends (70% of profit after a 35% tax rate), impacted by 14% interest-bearing borrowed funds affecting net gains .

First, determine the labor cost cycle, with labor accounting for 30% of total costs every 30 days, summing to 108,000€. Factoring in a 30-day payment deferment and a 10% safety margin, additional capital (12,000€) is needed on top of the calculated amount to ensure uninterrupted operation .

Average duration is assessed by integrating deferment periods weighted by respective expense proportions (e.g., raw materials, labor, and overheads as percentages of total monthly costs) to formulate a cash flow cycle representation .

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