Thequestion,however,becomeswhetheritcanbeasourceof
cashflowsforlongerthanthat.Atsomepointintime,there
willbenomoreinefficiencyleftinthesystemandanyfurther
decreasesinworkingcapitalcanhavenegativeconsequences
forrevenuegrowthandprofits.Therefore,wewouldsuggest
that for firms with positive working capital, decreases in
workingcapitalarefeasibleonlyforshortperiods.Infact,we
would recommend that once working capital is being
managedefficiently,theworkingcapitalchangefromyearto
year be estimated using working capital as a percent of
revenues. For example, consider a firm that has noncash
workingcapital thatrepresents 10 percent ofrevenuesand
thatyoubelievethatbettermanagementof workingcapital
couldreducethisto 6 percentofrevenues.Youcouldallow
workingcapitaltodeclineeachyearforthenextfouryears
from 10 percent to 6 percent and, oncethis adjustment is
made,beginestimatingtheworkingcapitalrequirementeach
yearas 6 percentofadditionalrevenues.Table3.1provides
estimatesofthechangeinnoncash workingcapitalonthis
firm,assumingthatcurrentrevenuesare$1billionand that
revenuesareexpectedtogrow 10 percentayearforthenext
five years.
TABLE3.1ChangingWorkingCapitalRatiosandCashFlow
Effects