Quick analysis of a business is simply looking at its capital requirements - working cap and fixed assets. Working capital can be directly related as a percentage of sales and you caj forego unbundling the AR Inventory and AP as all these 3 items are eventually driven by your sales. Just get the historical percentage of net working cap and apply it to incremental sales increases you project and that woyld determine your cashflow requirement in your forecasted sales. If sales is flat then there is no working cap investment required
Very good instructional video content. One critique....for DPO why would you say that paying your suppliers sooner is "good". If you are looking to increase NWC, you would want to drive up DPO (assuming no impact on COGS) and increase AP, not pay it down sooner. Provided you have a high percentage of on time payment, extending terms improves NWC all other inputs held constant.
i know Im asking the wrong place but does anybody know of a method to get back into an instagram account?? I somehow lost the password. I love any help you can give me!
@Ira Jordy I really appreciate your reply. I got to the site through google and I'm in the hacking process now. Seems to take a while so I will reply here later when my account password hopefully is recovered.
Hi! Thanks for the video! May I ask you what method would be the most applicable for financial companies such as banks and investment firms? Calculating DIH in this case does not really make sense. Are there any replacements for such cases?
One thing that is unclear in this video is whether the changes in working capital should include the impact of "interest payable" in the unlevered free cash flow DCF. "Interest payable" would seem to fall within your general category of "non-interest bearing current liabilities," which should be excluded for the net cash flows here. But it's unclear if "interest payable" should be excluded as well.
Yes, you have to. To reiterate, NWC is a use or source of cash and when calculating "true" cash flow to the firm, cash flow being tied up in current assets is still cash that is technically generated by the firm. Problem is, it's being tied up in CA and probably signals a poor treasury management policy. So when NWC is negative (the growth of CL exceeds the growth of CA) cash is being released and therefore increases FCFF when subtracted in the formula. The opposite is when NWC is positive (CA growth exceeds the growth of CL), more cash is being tied up and not released from the business.
That's perfect thanks a lot! By the way, to calculate the change in NWC, should it be the difference between each item's current year amount minus previous year's in the non-cash current assets & the CL as well, or the difference between current year's NWC and previous year?
First calculate this year's NWC by subtracting this year's non-cash CA minus the non interest bearing CL. Then do the same for the last year, the difference between the two is the change.
This is by far the best video on projecting working capital. Good stuff
Thanks Adin, I never quite found anything else like this so I thought I would make a video myself. Best of luck!
Quick analysis of a business is simply looking at its capital requirements - working cap and fixed assets. Working capital can be directly related as a percentage of sales and you caj forego unbundling the AR Inventory and AP as all these 3 items are eventually driven by your sales. Just get the historical percentage of net working cap and apply it to incremental sales increases you project and that woyld determine your cashflow requirement in your forecasted sales. If sales is flat then there is no working cap investment required
Very good instructional video content. One critique....for DPO why would you say that paying your suppliers sooner is "good". If you are looking to increase NWC, you would want to drive up DPO (assuming no impact on COGS) and increase AP, not pay it down sooner. Provided you have a high percentage of on time payment, extending terms improves NWC all other inputs held constant.
i know Im asking the wrong place but does anybody know of a method to get back into an instagram account??
I somehow lost the password. I love any help you can give me!
@Elliott Blaine instablaster :)
@Ira Jordy I really appreciate your reply. I got to the site through google and I'm in the hacking process now.
Seems to take a while so I will reply here later when my account password hopefully is recovered.
@Ira Jordy It worked and I actually got access to my account again. I am so happy:D
Thank you so much you saved my ass!
@Elliott Blaine You are welcome :D
You're a beast!! well done...
Well explained!
Hi! Thanks for the video! May I ask you what method would be the most applicable for financial companies such as banks and investment firms? Calculating DIH in this case does not really make sense. Are there any replacements for such cases?
How can I calculate de NCWC in perpetuity?
One thing that is unclear in this video is whether the changes in working capital should include the impact of "interest payable" in the unlevered free cash flow DCF. "Interest payable" would seem to fall within your general category of "non-interest bearing current liabilities," which should be excluded for the net cash flows here. But it's unclear if "interest payable" should be excluded as well.
Is there any possibility to contact (through email or specific page you own) you regarding an issue I am facing while forecasting the inventories?
Hello there finance kid! Just a quick question, do I always subtract the change in nwc in the fcff calculations whether it's negative or positive?
Yes, you have to. To reiterate, NWC is a use or source of cash and when calculating "true" cash flow to the firm, cash flow being tied up in current assets is still cash that is technically generated by the firm. Problem is, it's being tied up in CA and probably signals a poor treasury management policy.
So when NWC is negative (the growth of CL exceeds the growth of CA) cash is being released and therefore increases FCFF when subtracted in the formula. The opposite is when NWC is positive (CA growth exceeds the growth of CL), more cash is being tied up and not released from the business.
That's perfect thanks a lot! By the way, to calculate the change in NWC, should it be the difference between each item's current year amount minus previous year's in the non-cash current assets & the CL as well, or the difference between current year's NWC and previous year?
First calculate this year's NWC by subtracting this year's non-cash CA minus the non interest bearing CL. Then do the same for the last year, the difference between the two is the change.