How to forecast working capital items ?

milous31's picture
Rank: Chimp | banana points 12

Hi everyone !
I'm wondering how can I forecast working capital and more specifically " current asset or current liabilities". I first took the opening and the closing balance previous year and I calculated the variation. But, I would like to find a better methods. If you can suggest me some articles, website I would be glad.

Comments (7)

Oct 30, 2018

You should use the efficiency ratios: DPO, DSO and DIO (look fo them on google).

It means relating the WK investments to revenue trends and then you can hypothize efficiency performance --> improvements or worsening of management of WK based on assumptions of the companies and industry features

Nov 5, 2018

Sorry for the late reply. Thank you for your response!
I am also searching how to forecast accrued payroll ? by any chance, do you have a method as well?

Array

Oct 30, 2018

Given that I have never forecasted it, I would opt for one of the following methods, ordered form the one I would use to the last chance:

  • Ratio relative to the payroll/wages expenses (if the income st. explicits it, but pay attention because if the general expenses (SGA) include wages of managers, sellers etc. you can't use it)
  • Ratio relative to the number of employees (if you know the number)
  • Ratio relative to the revenue

Each one using the same formulas used in the DPO,DSO and DIO but substituting the denominator with the measure I suggested in the bulllet points.

Nov 5, 2018

Thank you for your clear explaination :) I will try

Array

Nov 5, 2018

You need to look at pay period timing if you're trying to get a very accurate accrued payroll balance.

If you're just looking for trends then Ajeje's methods are fine, but if you need a specific 12/31 balance (and it's material) you need to look at pay periods. If employees are paid every 2 weeks then timing could make a big difference in the accrual

twitter: @CorpFin_Guy

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Oct 30, 2018

Just optimise like you would normally do.. in-sample, out-of-sample.. You won't need anything too complicated if youre asking this question, just go for your basic ARIMA and optimise from there..

-- Monkey 1

Nov 5, 2018
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twitter: @CorpFin_Guy