Assume a company has the following values derived from the financial statements:
- Cash on hand: $100,000
- Accounts receivable: $25,000
- Securities: $120,000
- Inventory: $50,000
- Value of Machinery (after depreciation): $25,000
- Value of Land: $20,000
- Accounts payable: $85,000
- Current debt: $40,000
- Accrued expenses: $35,000
- Total sales: $650,000
The first step to calculate working capital is identifying current assets. Here, the current assets are cash on hand, accounts receivables, securities, and inventory.
Current Assets = $100,000 + $25,000 + $120,000 + $50,000 = $ 295,000.
The next step is calculating current liabilities. In the given examples, account payables, current debt, and accrued expenses are current liabilities.Current Liabilities = $85,000 + $40,000 + $35,000 = $160,000
The final step is to calculate the working capital.
Working Capital = Current Assets – Current Liability = $295,000 - $160,000 = $135,000
To identify the working capital per dollar of sales, divide working capital by total sales = $ 135,000/ $ 650,000 = 0.207 or 20.7 percent.
There is no optimal working capital ratio, and the ideal level depends on factors such as company’s cash requirement, working capital maintained by industry peers, management strategy, and other factors.