we should tie the changes in working capital to expected
changesinrevenuesorcostsofgoodssoldatthefirmover
time.Thenoncashworkingcapitalasapercentofrevenues
canbeused,inconjunctionwithexpectedrevenuechanges
each period, to estimate projected changes in noncash
working capital over time. We can obtain the noncash
workingcapitalas apercent ofrevenuesbylookingatthe
firm’s history or at industry standards.
Shouldwebreakworkingcapitaldownintomoredetail?In
otherwords,isthereapayofftoestimatingindividualitems
suchasaccountsreceivable,inventory,andaccountspayable
separately?Theanswerwilldependonboth thefirmbeing
analyzedandhowfarintothefutureworkingcapitalisbeing
projected.Forfirmswhereinventoryandaccountsreceivable
behavein very different waysasrevenues grow,itclearly
makessensetobreakworkingcapitaldownintodetail.The
cost, of course, is that it increases the number of inputs
neededto valueafirm.Inaddition, thepayoffto breaking
working capital down into individual items will become
smaller as we go further into the future. For most firms,
estimatingacompositenumberfornoncashworkingcapitalis
easiertodoandoftenmoreaccuratethanbreakingitdown
into more detail.
ILLUSTRATION3.11:EstimatingNoncashWorkingCapital
Needs: Target
In the preceding illustration, we estimated that noncash
working capital increased from $3,526 million in 2003 to
$3,961million in2004, an increaseof $435million.As a
percentofrevenues,noncashworkingcapitalincreasedfrom
8.62%of revenuesin 2003 to8.67% ofrevenuesin 2004.