4.1.2. Working capital investment

Working capital investment can be confused with the net working capital but it is a different concept as it refers to the calculation of working capital needed for operations, thus excluding unnecessary treasury the company may hold. The working capital investment is calculated through deducting the value of the cyclical resources to the cyclical operating needs.

• \(Working\ Capital\ Investment=Cyclical\ Operating\ Needs-Cyclical\ Operating\ Resources\)

If the working capital investment is positive, it means that the operational liabilities (not financial) are not sufficient to meet the operational cash needs of the company. In such situations, the company can turn to the short-term funding or to permanent financing financing.

The company has sufficient resources to finance the operational activity when the working capital investment is negative.

Cyclical Operating Needs

The cyclical needs reflect the funds that the company needs for its operational activity. It corresponds to the addition of most current assets accounts, except those attributable to the treasury:

• Clients
• Inventory
• Advances to suppliers
• State and other public entities (receivables)
• Other debtors and current assets (operating)
• Minimum cash balance

Cyclical Operating Resources

The cyclic operating resources reflect the operating resources that the company holds. It aggregates the components of the current liabilities to exception of the treasury:

• Suppliers
• Advances from customers
• State and other public entities (payables)
• Other accounts payables
• Other liabilities (operating)

Asset Treasury

The asset treasury is the third component of the functional balance and is composed of surplus cash balances. The surplus cash balance is given by the cash that exceeds the minimum cash requirement defined by the company. The common assumption is that balance sheet’s cash and deposit account can be distributed between minimum cash and surplus cash.

• \(Cash\ and\ deposits=minimum\ cash+surplus\ cash\)

Hence, the surplus cash that is included in asset treasury is calculated by deducting the minimum cash to the Cash and deposits.

• \(Cash\ surplus=Cash\ and\ deposits+minimum\ cash\)

There is no fixed rule set the minimum cash. It arises from each company’s treasury management policy. Among other options these some of the most commonly used policies:

• To set the minimum cash as a percentage of revenues.
• To set the minimum cash as a number of average daily sales.
• To set the minimum cash as a number of average daily profit

Passive treasury

It includes current debt, mostly from loans, although in certain cases it can also include short-term loans from shareholders.

Net treasury

The net treasury is determined by the balance between the asset and the liabilities treasuries.

• \(Net\ treasury=Asset\ treasury-Liability\ treasury\)

It can also be determined by the balance between the working capital and the working capital investment.

\(Net\ treasury=working\ capital-working\ capital\ investment\)