Hi fellows,
A quick question I had never encountered and was asked:
"If your revenue goes up and Working Capital goes down, what are the impacts on your cash? Does it go up or down? Detail your answer"
Thx in advance,
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All else being equal, Revenue up means NI increases, NWC going down means CA decreases or CL increases or both; either way this is a "source" of cash... Cash goes up
Agreed.
Felt like a trick question because I didn't see the point of saying "revenue increases".
Thanks,
erh.....what if they say revenue decreases and working capital goes down?
RWP, then you need the EBIT margin and the tax rate:
If Decreased Rev * EBIT margin * (1-Tax Rate) > Decrease in WC, then cash goes down. Otherwise, cash is neutral (both sides equal), or increases (WC decrease greater than after-tax loss of EBIT)
of course, there are many other assumptions you need to know before making the judgement. assuming the interviewier has implied all things else being constant since they didn't mention it in the question.
I was just pointing out that whether revenue increases/decreases is not an unnecessary information.
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