FACTORS AFFECTING THE NEED FOR WORKING

CAPITAL
AND WORKING CAPITAL NEED CALCULATIONS
Factors Related with the Firm

1. Type of the firm, characteristics of the market, the size of the firm: size of
the firm is the most important factor and total sales is the main indicator.
Regarding the type of the firm:
Factors Related with the Firm

2. Turnover rate of assets and liabilities

I. Turnover rate of current assets=.
II. Cash turnover rate=.
III. Receivables turnover=
IV. Inventory turnover=
Factors Related with the Firm

3. Conditions for supply and sales:

4. Liquidity:
5. Inventory Valuation Methods:
6. Production capacity and usage:
7. Production Time:
8. Dividend and growth policies:
Factors Related with the Firm

9. Volatility of earnings:
10. Trade payables:
11. Cost of capital:
12. Deprecation methods:
I. Straight Line Depreciation:
II. Declining-balance:
III. Rising-balance:
Straight Line Depreciation

Depreciation
Years Value of the asset
percentage
Amount depreciated  
1 500.000 25% 125.000
2 500.000 25% 125.000
3 500.000 25% 125.000  
4 500.000 25% 125.000

Total     500.000 TL.

Declining-balance

Depreciation
Years Value of the asset
percentage
Amount depreciated  
1 500.000 1/10 50.000
2 500.000 2/10 100.000
3 500.000 3/10 150.000  
4 500.000 4/10 200.000

Total     500.000 TL.

Rising-balance

Depreciation
Years Value of the asset
percentage
Amount depreciated  
1 500.000 4/10 200.000
2 500.000 3/10 150.000
3 500.000 2/10 100.000  
4 500.000 1/10 50.000

Total     500.000 TL.

Factors Related with the Firm

13. Risk Attitude of the management

I. risk averse
II. risk seeking
III. risk neutral
External Factors

1. Tax Policies:
2. Public Aid:
3. Price volatility, changes in the general conditions, and periodical volatilities:
4. Technological changes:
5. Financial markets development
Finding the need for working capital
1. Operating Cycle Coefficient
Time
Raw Material 20
Production Time 10
Products as inventory 10
time that accounts receivable remain outstanding 30
cash 10
Days in year 360
time that trade payables generally remain outstanding 35
Cost(.000 TL)
Raw material 16.200
labour 1.440
general manufacturing overhead 6.120
depreciation 2.000
financial expense 9.000
Cost of production 34.760
general administrative and sales costs 3.825
Total Cost 38.585
Profit 20.000
 Finding the need for working capital
1. Operating Cycle Coefficient
Operating Cycle Coefficient

Operating Cycle Time

Operating Cycle Coefficient

Total Cost without depreciation

Need for Working Capital

Operating Cycle Coefficient (for each element of WC)

  Daily Cost Operating cycle time total cost

Daily need for inventory
daily need for receivables
daily need for cash
Need for Working Capital
Finding the need for working capital
2. Daily Cost Method
Time
Raw Material 20
Production Time 10
Products as inventory 10
time that accounts receivable remain outstanding 30
cash 10
Days in year 360
Time that trade payables remain outstanding 35
Cost(.000 TL)
Raw material 16.200
labour 1.440
general manufacturing overhead 6.120
depreciation 2.000
financial expense 9.000
Cost of production 34.760
general administrative and sales costs 3.825
Total Cost 38.585
Profit 20.000
Total Sales 58.585
Finding the need for working capital
2. Daily Cost Method

Daily Cost for each element Daily Cost

Raw material
labour
general manufacturing overhead
financial expense
general administrative and sales costs
Total Daily Cost
Profit
Sales
 Finding the need for working capital
2. Daily Cost Method
Operating
  Daily Cost Cycle Time Total Cost
Raw Material
Intermediate goods
(Raw Material+Labour+(Financial+GMO)/2)
Product
(Intermediate good+ (Financial+GMO)/2)
Receivables
(Total Daily Cost)
Cash
(Total Daily Cost)
Need for Working Capital
Trade Receivables
(Daily Raw Material Cost)
Net Working Capital Need
Finding the need for working capital
3. Schmallenbach Method
 S:Average Inventory
 Kb: Profit Margin
 Hs:Sales
 Gg: Annual General Administrative and Sales Expenses
 V1: Time that trade payables remain outstanding
 V2: time that accounts receivable remain outstanding
Finding the need for working capital
3. Schmallenbach Method
 S:Average Inventory
 Kb: Profit Margin
 Hs:Sales
 Gg: Annual General Administrative and Sales Expenses
 V1: Time that trade payables remain outstanding
 V2: time that accounts receivable remain outstanding
 M:Annual Raw material
Finding the need for working capital
4. Mellerowicz Method
 Mg: Daily cost
 Hg: Daily raw material cost
 T1: Production time
 T2: Time as inventory
 T3: Time as raw materail
 T4: time that accounts receivable remain outstanding
 T5: Time that trade payables remain outstanding