## Treatment of working capital

Invest for Excel® provides a structured approach to the treatment of Working capital.

There are three main Working capital groups: Short-term assets, Inventories and Current liabilities (see Picture 1)

By defining each of these components, you receive a more accurate estimation of your project or business. It only takes a few minutes to define each sub-group by entering required data in **days** (Option A) or by entering the estimated average values in the **Adjusted balance** rows (Option B) (see Picture 1).

*Picture 1. Working capital.*

**Option A. Entering data in days**

**Note:** If the Average term of payment for accounts receivable / accounts payable / turnover period is longer than the number of days per column (e.g. 45 days in a monthly calculation) the balance will be increased by only 30 days of costs (not 45), however, the next period or periods will be affected cumulatively.

*Step 1. Defining Short-term assets*

How much short-term assets an investment project or business ties up depends mainly on Accounts receivable.

Enter the Average term of payment for accounts receivable in days (i.e., the average number of days from delivery until payment) and the program will calculate the average amount of accounts receivable per interval based on sales (Income row in Income statement) and rotation. The following formula is used:

Invest for Excel® also allows defining **Other receivables** and **Minimum cash** reserves (see Picture 3).

The total of short-term assets is calculated by program according to the following formula:

*Step 2. Defining Inventories*

Inventories tie up capital and have an impact on the investment's profitability. Inventories comprise:

- Raw materials and consumables (materials and supplies);
- Work in progress;
- Finished goods.

Enter Turnover period in days and the program will calculate the average amount of inventories per interval and rotation. The following formula is used:

The true residual value of the inventory can be entered into the last column if a value different from the one calculated by the application is preferred.

*Step 3. Defining Current liabilities*

Defining current liabilities helps to better answer the question of how much less working capital is needed thanks to payment terms to suppliers.

Enter the average term of payment for accounts payable in days (i.e., the average number of days from receiving the goods until payment). The program will calculate the average amount of accounts payable per interval, by default, based on the two first rows of Variable costs (“Raw materials and consumables” and “External charges”) in the Income statement.

Invest for Excel® liquidates the accounts payable automatically at the end of the investment term in the last column, otherwise they would remain outstanding (unpaid). To overrule this feature, type in the preferred value in the row Adjusted balance in the “Residual” column.

Other than accounts payable there may be other current liabilities, e.g. advance payments from customers, tax liabilities, accrued expenses or prepaid revenues. This kind of items are not necessary required in all investment calculations.

Current liabilities are calculated according to the formula:

**Option B: Estimated average values**

As it was mentioned before, there is an alternative way of defining short-term assets, inventories and short-term liabilities: entering the estimated average values in the **Adjusted balance** rows (see Picture 3). The values in the “**Adjusted balance**” rows overrule the values entered in **days** (by Option A).

**Result**

The last row of the table,** Net working capital**, shows the netted working capital tied up in the project or business. The larger the inventories are, the more capital they tie up. The longer the payment term given to customers, the more capital is out of the cash reserves. The terms of payment concerning accounts payable work in an opposite way.