Calculations of working capital requirements in the cash flows framework

The goal of the paper is to find an answer to the following question: How much ones has to invest in the working capital? So far this amount has been usually calculated by subtracting current operational resources from current operational requirements [Richards, Laughlin 1980, Shulman, Cox 1985]. According to the Author, the accurate answer to this basic question of calculating working capital requirements should be incorporated into the cash flows framework. As a result of these research the working capital requirements are measured by the following equation:

WCR_t = M₀ + FP₀ + C₀ + ∑^t_t=1CF_t^- - ∑^t_t=1NCF_t⁺

where:

WCR – working capital requirements

M₀ – materials reserve

FP₀ – finish product reserve

C₀ – operating cash reserve

CF ^- - operating cash outflows

NCF⁺ - net operating cash inflows

 ∑^t_t=1NCF_t⁺ = ∑_t=1^t-TAR+1S_t∙cm

S – sales in units

cm –manufacturing unit cost

TAR – accounts receivables settlement period

t – day, t = 1, …,n

The paper covers the following issues: (1) the revision of the concepts of working capital in the fields of economics, accountancy and finance, (2) the revision of the methods of calculating working capital requirements, (3) the construction of the theoretical model of working capital, (4) the derivation of the formula for working capital requirements based on cash flows and (5) the simulations on the working capital model that indicate the sources of inconsistency between suggested and other methods of calculating working capital requirements. The simulated values prove that the latter give biased estimations of working capital requirements.