Technical Q: Driving WC off something other than Sales or COGS
Hello,
I'm working on a model where COGS nor GP is not broken out. In making WC projections (a/r % of sales, etc.), can we drive certain line items, for example accounts payable or accrued wages, off something other than COGS, such as Payroll & Benefits?
As a last quick question, are marketable securities considered a part of working capital? Do you include changes in it to get to FCF?
Thanks
Can't help with the whole question, but I've seen accounts payable projected as a function of inventory (which I think makes sense).
Technically speaking, WC is current Assets - Current liabilities so it would be included. However, on the deals I've been on, we usually don't include cash (Pretty sure this means we wouldn't include marketable securities also). This could be mainly due to the fact that the transactions are cash free and debt free though.
that's why the formula says NET WORKING CAPITAL; it's net from cash&equivalents. the "current" stands for current operations so you might actually need to include some of that cash.
I agree. But OP didn't say net working capital. OP simply said working capital. Which, is CA (including cash) - CL. If OP is looking for NWC, (which I didn't assume) then yes you would be correct. And you are also correct in that OP would include the cash that is excess above the necessary amount to maintain current operations.
Thanks. I suppose it isn't "working", nor very related to operations, but it is still included in the CFO in the Statement of cash flow i was given. A/P as a function of inventory is helpful, but inventory is a function of COGS (which is not broken out in my model).
dlete
To be clear, "Net" has nothing to do with inclusion or exclusion of cash. Net Working Capital is Current Assets - Current Liabilities, where Current Assets does include cash and marketable securities in its most basic definition. However for purposes of valuation and calculating FCF, cash and marketable securities are not included as those are not an operating assets. You would include cash and marketable securities when calculating certain financial ratios though (e.g., Current Ratio).
The inclusion of marketable securities in CFO is probably adding back the Loss/Gain on Sale of Marketable Securities, because the loss/gain is included in your Income Statement and you're trying to remove the impact of that transaction since that's not an operating activity. You would subsequently include the sale of marketable securities in Investing Activities though.
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