Hey guys,
Let's say the industry i am researching is generally negative working capital (-10% of the forecasted revenue). Thus, let's say the revenue is 20Millions, the working capital required for general working purpose is 2M or -2M?? I am unable to reconcile the fact since it is negative working capital. It doesn't make sense to me when the working capital for working purpose is negative
Thanks.
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My first question would be is this net working capital balance or is this a change in working capital. I almost think it's your balance.
Change in working capital is often negative in forecasts driven by growth.
If in year 1 rev is 20mm, let's say NWC balance is 2mm.....in year2 let's say rev is 30 implying NWC balance of 3mm. Take year 1 minus year 2 and you get -1mm change in NWC.
Wait in the scenario you just described the change is positive (2mm -> 3mm) but I think what you mean is that the fcf impact is negative.
I agree with the above reply. Also, if it truly is negative working capital it isn't that abnormal. You see this a lot with subscription service models of software companies with high deferred revenue balances.
In general, I agree with the reply above in that the (1MM) change represents the cash outflow to generate the additional 10MM in revenue.
What industry is this? Negative nwc can only be sustained in the short run and all it really means is that the company currently has more short-term liabilities than short-term assets.
Food retailers for exmample have negative working capital as they sell their product relatively quickly, while having 30/60/90 days to pay their suppliers. If you double the business, working capital will be a source of cash instead of absorbing cash.
I see, that makes sense. Thanks for explaining!
One add-on question here:
Aren't you actually just describing a negative cash-conversion-cycle? How does it actually turn the working capital (current assets - current liabilities) negative?
TIA!
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