Forecasting NWC

Forecast Net Working Capital

Based on the working capital requirements in the Business Plan (Ideko - Working Capital Requirements), the spreadsheet below forecasts Ideko’s net working capital (NWC) over the next five years.

Each line item in cab be found by computing the appropriate number of days’ worth of the corresponding revenue or expense from the income statement. For example, accounts receivable in 20X6 is calculated as:

Similarly, Ideko’s inventory of finished goods will be: \(45 * (18.665 + 21.622)/365 = $4.967 \text{million.}\)

Minimum Cash Balance

The sheet also lists Ideko’s minimum cash balance each year. This balance represents the minimum level of cash needed to keep the business running smoothly, allowing for the daily variations in the timing of income and expenses. Firms generally earn little or no interest on these balances, which are held in cash or in a short-term savings account. As a consequence, we account for this opportunity cost by including the minimal cash balance as part of the firm’s working capital.

We assume that Ideko will earn no interest on this minimal balance. (If it did, this interest would reduce the firm’s net interest expense in the income statement.) We also assume that Ideko will pay out as dividends all cash not needed as part of working capital. Therefore, Ideko will hold no excess cash balances or short-term investments above the minimal level reported above.

Net Working Capital

Ideko’s net working capital for each year is also computed, as the difference between the forecasted current assets and current liabilities. Increases in net working capital represent a cost to the firm. As a result of the improvements in accounts receivable and inventory management, Ideko will reduce its net working capital by more than $3.4 million in 20X6. After this initial savings, working capital needs will increase in conjunction with the growth of the firm.