Working Capital and Operating Cycle in Excel

Working capital is the difference between a company’s current assets and current liabilities. It measures how much cash and other liquid resources a company has to meet its short-term obligations and fund its operations. A positive working capital means that the company has more current assets than current liabilities, while a negative working capital means the opposite.

The amount of working capital depends on the accounting methods used to determine earnings, as well as the operating cycle. The operating cycle is the time it takes for a company to convert its inventory into cash, and then use that cash to pay off its suppliers. The shorter the operating cycle, the less working capital a company needs, and vice versa.

One way to calculate the working capital and the operating cycle is to use Excel formulas. The following steps explain how to do this:

1. Gather the necessary data from the company’s financial statements, such as the cost of goods sold (COGS), the average inventory, the average accounts receivable, the average accounts payable, and the desired cash and bank balance. You can also use estimates or assumptions if the actual data is not available.
2. Calculate the inventory days, the receivable days, and the payable days using the following formulas:
   • Inventory days = (Average inventory / COGS) x 365
   • Receivable days = (Average accounts receivable / Sales) x 365
   • Payable days = (Average accounts payable / COGS) x 365

   These formulas measure how long it takes for a company to sell its inventory, collect cash from its customers, and pay its suppliers, respectively.

3. Calculate the operating cycle and the working capital cycle using the following formulas:
   • Operating cycle = Inventory days + Receivable days
   • Working capital cycle = Operating cycle – Payable days

   These formulas measure how long it takes for a company to convert its inventory into cash, and then use that cash to pay off its current liabilities, respectively.

4. Calculate the working capital using the following formula:
   • Working capital = (COGS x (Working capital cycle / 365)) + Desired cash and bank balance

   This formula measures how much cash and other current assets a company needs to fund its operations and meet its short-term obligations.

To illustrate these steps, let’s use a hypothetical scenario with the following data:

• COGS = $10,000,000
• Average inventory = $2,000,000
• Average accounts receivable = $1,500,000
• Average accounts payable = $1,000,000
• Desired cash and bank balance = $500,000
• Sales = $15,000,000

Using these data, we can create an Excel table like this:

The result shows that the company has a working capital of $2,500,000, which means that it has enough current assets to cover its current liabilities and fund its operations. The working capital cycle is 73 days, which means that it takes 73 days for the company to convert its inventory into cash, and then use that cash to pay off its current liabilities. The operating cycle is 109 days, which means that it takes 109 days for the company to convert its inventory into cash.

There are other approaches to calculate the working capital and the operating cycle, such as using ratios, cash flow statements, or projections. However, the Excel formula method is simple and convenient, as it only requires basic data and calculations. You can also modify the formulas or add more variables to suit your specific needs or preferences. However, you should always be careful with the accuracy and validity of the data and the assumptions that you use, as they may affect the results and the interpretation of the working capital and the operating cycle.