Calculation of Working Capital Requirements

Working capital represents the portion of a company's capital that is constantly in circulation and used to support ongoing operations. It includes cash,
raw material and material inventories, work-in-progress, finished goods, and accounts receivable.

When a business starts to grow, there is a need to increase working capital to sustain growth. A shortage of working capital can become a serious problem
for a growing business, as money does not instantly turn into profit. For a significant part of the time, it is in other forms - on the way to the supplier, in the
form of goods in the warehouse, delivered to the consumer in the form of finished products, and still within the banking system until it reaches the
company's account.

The financial cycle, or the time during which money makes a full turnover, plays a key role in managing working capital. The longer this cycle, the more
money is simultaneously in circulation but only "preparing" to bring profit. Increasing sales volume requires additional involvement of working capital
to maintain this cycle.

Example of Working Capital Calculation

Suppose the company decided to sharply increase sales of imported goods. To determine the required amount of working capital, the following initial data is used:

• Average cost of one delivery batch: $160,000
• Additional customs procedure costs: $39,500
• Time from order to delivery to the warehouse: 3 days
• Average customs procedure time: 1 day
• Delivery time to the customer: 3 days
• Average payment deferral time: 7 days
• Payment order execution time: 3 days
• Customer funds in transit: 1 day

Additional data for calculation:

To ensure sales for the specified operations, the following amount of working capital is required:

Explanation of the second column calculation: Sales volume is multiplied by the number of days in transit and divided by 30 (number of days in a month).
In this case, for $800,000: 800,000×18 / 30 = 480,000 USD.
For $1,040,000: 1,040,000 × 18 / 30 = 624,000 USD.

Explanation of the fourth column calculation: The values of the second and third columns are summed.
For $800,000: 480,000 + 260,000 = 740,000 USD.
For $1,040,000: 624,000 + 340,000 = 964,000 USD.

Thus, to ensure an increase in sales volume by $240,000, it is necessary to involve working capital in the amount of $224,000.

Based on these calculations, it can be concluded that for successful business growth, it is necessary to carefully plan and manage working capital.
This will avoid shortages and ensure the stable development of the enterprise.