4.4 Capital requirement calculation

4.4.4 Working capital

Working capital is defined by the tangible assets held as current assets. These include:

• Inventories such as raw materials and supplies, finished goods, work in progress and merchandise.

Setting up and building up a warehouse to start a business can be considered working capital. It must be pre-financed as part of the start-up investment.

The importance of inventory is huge, particularly for manufacturing companies, especially in terms of delivery times and customer orientation.

Stocks should be large enough so that the business can always produce and deliver. However, they should not be higher than required for the economic operation of the business. Too large stocks deprive the business of liquid funds, increase interest, storage costs and the risks of spoilage, shrinkage, theft, fire, obsolescence and price decline. Stocks that are too small jeopardise sales or production readiness and may require low-priced, urgent orders.

Depending on the storage volume, the capital commitment can be of great importance for the company. The stock or goods turnover is to be determined within the framework of the calculation of working capital. The higher the turnover rate, the lower the capital employed.

 

The turnover rate is calculated as the turnover coefficient in terms of volume and value:

 

Turnover rate:

Quantitative =	Cost of sales (quantity)
	Average stock
Value =	Cost of sales (Euro)
	Average stock
Storage period =	360 days
	Turnover frequency (days, months...)

Table 31: Turnover rate

 

Within the framework of capital procurement, it must be determined for what purpose and in what amount current assets must be invested.

Other current assets:

• Trade receivables, which are, for example, goods, products or services that have been delivered to customers but not yet paid for.
• Receivables from affiliated companies, e.g. in a holding company or public limited company,
• Receivables from loans given by the company to third parties, e.g. suppliers.
• Bills of exchange that have been issued but not yet honoured,
• Cash on hand, balances with banks and institutions,
• Securities, shares,
• When determining the capital requirement from the current assets, it is particularly important to take into account the liabilities to third parties. Liabilities can be differentiated:
• Liabilities to credit institutions (loans, loans from development programmes, etc.)
• Trade payables that the company still has outstanding.

The receivables are to be compared with the liabilities in order to be able to determine the capital requirement for the current assets.