PT.

XYZ Industry Average

Current Ratio 1.75x 2.25x

Quick 0.83x 1.20x
Debt / Assets 58.76% 50.00%
Turn Over of Cash and Securities 16.67x 22.22x
Days Sales Outstanding 45.63 32.00
Inventory Turn Over 4.82x 7.00x
Fixed Assets Turnover 11.35x 12.00x
Total Assets Turnover 2.08x 3.00x
Profit Margin 2.07% 3.50%
Return On Equity 10.45% 21%
Payables Deferral 30.00 33.00
Example
Let us calculate net operating working capital for IBM (NYSE: IBM) for financial year 2012.

Total Operating Non-operating

CURRENT ASSETS
Cash and cash equivalents 10.412 10.412
Marketable securities 717 — 717
Notes and accounts receivable-trade 10.667 10.667
Short-term financing receivables 18.038 — 18.038
Other accounts receivable 1.873 1.873
Inventories 2.287 2.287
Deferred taxes 1.415 1.415
Prepaid expenses and other current assets 4.024 4.024
Subtotal 49.433 30.678 18.755

CURRENT LIABILITIES
Taxes 4.948 4.948
Short-term debt 9.181 — 9.181
Accounts payable 7.952 7.952
Compensation and benefits 4.745 4.745
Deferred income 11.952 11.952
Other accrued expenses and liabilities 4.847 4.847
Subtotal 43.625 34.444 9.181

Net Working Capital

= Current Assets − Current Liabilities
= $49,433M − $43,625M
= $5,808 million

Net Operating Working Capital

= Operating Current Assets − Operating Current Liabilities
= $30,678M − $34,444M
= -$3,766 million
Data
Annual Sales 1,216.70
COGS 1,013.90
Inventories 140
Account Receivable 445
Account Payable 115

Net Operating Working Capital 470

Inventory Conversion Period = Inventory/(COGS/day)

COGS/365= 2.777808 50.3994476773
50,4 days

Average Collection Period ( ACP ) =Receivable/ ( sales/365 )

Sales/365= 3.333425 133.496342566
133,5 days

Payables deferral period= Payables/ ( COGS/365 )

41.3995463063
41,4 days

Cash Conversion Cycle ( CCC ) 142.4962439369

142,5 days

Benefit Reducing Cash Conversion Cycle

Actual
Inventory Conversion Period ( ICP, days ) 50.4
Average Collection Period ( ACP, days ) 133.5
Payables deferral period ( PDP, days ) -41.4
Cash Conversion Cycle ( CCC ) 142.5

Reduction in CCC

Effect of the CCC reduction

Annual Sales 1216.7
COGS 1013.9
Inventory, target= New ICP)COGS/365) 140
Receivables, target=New ACP(Sales/365) 445
Payables, target = new PDP(COGS/365) -115

Net Operating WC= 470

Reduction in NOWC
Target
35
40
-50
25

117.5

1216.7
1013.9
97.2232876712
133.3369863014
-138.8904109589

91.6698630137

378.3301369863
 May June July August
Forecas gross sale 200 250 300 400
Adjustment: % deviation from forecast 0% 0% 0% 0%
Adjusted gross sale forecast 200 250 300 400

Collection on sales
During sales month 0.2(sales)(1-disc.0%) 58.8 78.4
During 2nd month 0.7(prior month sales) 175 210
Due in 3rd month 0.1(sales 2 month ago ) 20 25
Less bad debts ( BD%xsales 2 months ago ) 0 0
Total Collections 253.8 313.4

Purchases : 60% of next month's sales 180 240 300

Payments
PMT for last month's purchases(30days of credit) 180 240
Wages and Salaries 30 40
Lease Payments 30 30
Other Payment ( Interest on LT bonds, dividends,etc ) 30 30
Taxes
Payment for Plant construction
Total Payment 270 340

Net Cash Flow

Assumed excess cash on hand at start of forecast period 0
Net Cash Flow : Total Collections-Total pmts -16.2 -26.6
Cummulative NCF : Prior month cum plus this month's NCF -16.2 -42.8

Cash Surplus ( or loan requirement)

Target cash balance 10 10
Surplus cash or loan needed : Cum NCF -26.2 -52.8

Max required load ( n 234.8

Max Investable funds( 27
Sept Oct Nov Dec
500 350 250 200
0% 0% 0% 0%
500 350 250 200

98 68.6 49 39.2
280 350 245 175
30 40 50 35
0 0 0 0
408 458.6 344 249.2

210 150 120 120

300 210 150 120

50 40 30 30
30 30 30 30
30 30 30 30
30 30
150
590 310 240 240

-182 148.6 104 9.2

-224.8 -76.2 27.8 37

10 10 10 10
-234.8 -86.2 17.8 27