Working Capital Forecast
IntermediateA working capital forecast is an estimate of how much cash a business will have tied up in inventory and customer receivables, offset by amounts owed to suppliers, over a future period.
Working capital is current assets minus current liabilities. Changes in working capital affect cash. If a business holds more inventory or customers owe it more, cash is tied up. If it owes suppliers more, it temporarily holds on to more cash.
Working capital forecasts are often based on typical payment and stock patterns. A business might assume customers pay in 45 days, inventory is held for 60 days and suppliers are paid in 30 days. These assumptions are applied to forecast sales and costs.
For example, if a company's annual sales are expected to grow from 3.65 million to 4.38 million and customers pay in 45 days, receivables would grow from about 450,000 to about 540,000, tying up an extra 90,000 of cash.
This is why fast-growing businesses can run short of cash even when profitable. A working capital forecast helps them anticipate this and arrange financing in advance. It is a key link between profit forecasts and cash flow forecasts.
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