Working capital and its estimation for project evaluation

Abstract

Recent increases in costs and continuing inflation have increased working capital requirements beyond the levels commonly referred to in engineering literature. Estimating working capital by reference to fixed capital is no longer tenable. This paper describes an improved estimating method based on categorising the hold-up at six stages during manufacture, distribution and sale using approximate costs. The result is expressed in terms of annual sales value.

For products made and sold in U.K., minimum working capital requirements vary between £ 12 and £ 35 for £ 100 of annual sales according to the nature of the product and process. Values may exceed £ 60 for other markets. Results agree well with company published balance sheets.

The method improves the accuracy of project evaluation where errors in estimating working capital can be as significant as those in fixed capital costs. Some design aspects are listed where engineers may be able to reduce working capital or to optimise it against overall cost.