All About

Working Capital
(Actuals, Budget,
Forecast)
Unlocking Financial Agility:
Mastering Working Capital with LTM (Last
Twelve Months) Insights

Comprehensive Working
Capital Financial Model:
A Detailed Excel Roadmap

Authored by:
Ana Hernández
 Overview
Navigate the complexities of Working Capital with
confidence.

This detailed Excel financial model, meticulously crafted

by Ana Hernández, offers a strategic approach to
managing your company's working capital over the last
twelve months (LTM).

It provides clear visibility into the operating and cash

conversion cycles, illuminating the path to optimizing
liquidity and ensuring your business has the financial
agility to seize opportunities and drive growth.

By dissecting each component—receivables, payables,

inventory, and more—this model not only predicts
future cash flows but also pinpoints areas for
improvement.

Embark on a journey toward financial excellence and

leverage this model to steer your organization towards
a more robust and dynamic financial future.
The comprehensive financial model presented is a four-sheet structure designed to offer an in-depth
analysis and a bird’s-eye view of your working capital performance. Here’s a brief overview of each
sheet:

Working Capital Sheet: This is where the magic happens. Equipped with advanced formulas, this sheet
serves as the engine room of our working capital analysis. It takes into account various financial metrics,
interlinking them to forecast, analyze, and track the financial health of your business.

LTM Sheet: Your historical ledger, capturing the essence of your revenue streams. They meticulously
record the revenue month-by-month from the previous year and juxtapose it with the current year’s
actuals/forecast and budget, allowing for a seamless year-over-year comparison.

WC Data Sheet: This vital sheet focuses on the elements that make up your working capital: Accounts
Receivable (AR), Inventory, and Accounts Payable (AP). It provides month-by-month data, both
actual/forecast and budget, enabling you to monitor the nuances of your capital flow and manage your
assets and liabilities effectively.

Data Sheet: Serving as the repository of your raw financial data, this sheet draws directly from the Trial
Balance. It consolidates crucial information, such as Revenue and Cost of Goods Sold (COGS), excluding
payroll, and presents it in a month-by-month format for both forecast/actuals and budget. This sheet is
essential for feeding accurate data into the model for reliable financial analysis.

Together, these four sheets form a robust framework for analyzing working capital, ensuring you have all the
data you need to make informed financial decisions and maintain a healthy cash flow.
 Let’s start with the “LTM” sheet

Here you can see the formulas

The model reviews the past year from two angles: it outlines both
the recorded figures and our projected ones, and sets them side by
side with our budgetary goals

The Last Twelve Months (LTM) is not merely a record of the past; it's a pivotal financial
telescope that extends its view both backward and forward. By examining revenue
figures from the prior twelve months, we arm ourselves with a dynamic narrative of
the company’s financial journey, setting the stage for a strategic forecast and
budgeting process.
Why LTM matters:

1. Temporal Relevance: LTM captures the most recent performance, making it

more relevant than annual figures that can be dated by the time they're
reported.
2. Seasonality Insight: It unmasks the cyclical nature of business, revealing
patterns and trends obscured in standard fiscal reports, allowing for better
inventory and cash flow management.
3. Operational Performance: This snapshot offers a clear picture of
operational effectiveness, measuring the pulse of ongoing projects and
initiatives.
4. Strategic Forecasting: LTM data is crucial for predictive analytics, shaping a
more accurate forecast for the future by grounding expectations in the most
recent reality.
5. Investor Confidence: It demonstrates to stakeholders and potential
investors that management has a finger on the company’s financial pulse,
showcasing both stability and adaptability.
6. Benchmarking and Valuation: For valuation purposes, LTM figures provide
a contemporary benchmark, essential when comparing performance against
industry peers or evaluating the company for potential mergers and
acquisitions.

LTM’s utility is best realized when wielded by a skilled analyst, one who can
dissect the layers of data to distill actionable insights. By doing so, finance
professionals ensure that every strategic decision is informed by a
comprehensive, up-to-date financial understanding, one that aligns with both the
legacy and the trajectory of the business.
 The “WC Data” sheet

Having Q4 data from the previous year in the Working Capital (WC) Data sheet (2021),
encompassing Accounts Receivable (AR), Inventory, and Accounts Payable (AP) both in actuals
and budget, serves several strategic purposes:

Year-End Review: Q4 often reflects the culmination of a year’s financial activity, providing crucial
insights into seasonal impacts, year-end closing activities, and annual performance trends.

Benchmarking: It sets a benchmark for performance, allowing for a comparative analysis against
the current year's quarters to gauge growth, efficiency improvements, or declines.

Budget Accuracy: Including Q4 budget data helps in understanding the accuracy of past
forecasting and budgeting processes, which can refine these practices for current and future
periods.

Strategic Planning: The transition between years is pivotal for strategic planning. Knowledge of
Q4 helps to understand the carryover effects into the new year and aids in creating more robust
financial strategies.

Cash Flow Management: Understanding the liquidity position at the year's end through AR,
Inventory, and AP informs cash flow management strategies for the new fiscal year.

In essence, Q4 data acts as a bridge between two fiscal years, offering a retrospective view
that informs proactive decision-making.
 The “Data” sheet

For working capital purposes, separating payroll from the Cost of Goods Sold (COGS) can
provide a clearer picture of the company's short-term financial health and its operational
efficiency. Here's why it's specifically important:

Focus on Operational Liquidity: Working capital focuses on the company's liquidity and its
ability to cover short-term obligations without relying on external funding. By excluding payroll,
which is usually a fixed and regular expense, from COGS, you get a better sense of the liquidity
tied up in the production process itself.

Inventory Valuation Accuracy: Removing payroll costs allows for a more precise valuation of
inventory, as it reflects only the costs directly associated with producing or purchasing the
inventory, such as materials and direct labor.

Improved Cash Flow Management: Payroll is generally not a variable cost that fluctuates with
the level of production or sales. Keeping it separate from COGS can lead to more accurate cash
flow forecasting and management because it allows the company to plan for payroll expenses
independently from the direct costs that vary with inventory levels.

Clearer Cost Control: Separating payroll from direct production costs can highlight areas where
cost-control measures may be most effective. This could be in purchasing strategies for raw
materials or improving the efficiency of the production process, independent of payroll
considerations.

Strategic Decision-Making: When assessing the components of working capital, understanding

how much cash is tied up in inventory versus being spent on payroll can influence strategic
decisions such as hiring, layoffs, or investment in automation.

In summary, for working capital management, it's crucial to understand the nuances of how
cash is used in the business. Excluding payroll from COGS can lead to more strategic
management of liquidity and more informed decision-making regarding the company's
operational activities and short-term financial commitments.
 The “Working Capital” Model
1.- The Data from Prior Year

We need Revenue and

COGS (excluding
payroll) from the last
3 months

These are the

formulas

2.- The Net Working Capital Section

These are
the
formulas
 3.- The LTM Section

These are the formulas

4.- The Cash Conversion Cycle

These are the formulas

After showing how the model works, we

will develop a deep analysis of the
figures.
 The “Working Capital” Analysis
Net Working Capital (NWC):

Trend Analysis: The NWC actuals are consistently higher than budgeted, peaking in June. This
pattern suggests liquidity is tied up in working capital, potentially indicating less efficient use of
resources than planned.

Accounts Receivable (AR): There's a noticeable increase in AR, peaking in June, well above the
budget. While this could signal robust sales, the gap between actuals and budget may also reflect
slower than expected collections. A proactive approach to manage credit terms and collection
processes might be necessary to ensure liquidity is not adversely impacted.

Inventory Levels: Inventory actuals were close to or below budget, except for April and May,
which is favorable as it suggests controlled stock levels aligned with sales, minimizing carrying
costs and risks of obsolescence.

Accounts Payable (AP): AP actuals are mostly in line with the budget, suggesting that the
company is managing its payables according to plan. It's crucial to maintain these relationships
and negotiate favorable terms to support cash flow.

Cash Conversion Cycle (CCC):

Days Sales Outstanding (DSO): The actual DSO is higher than the budget, which raises concerns
about the liquidity and the efficiency of the company's credit and collections processes.

Days Inventory Outstanding (DSI): The DSI is generally in line with budget estimates, suggesting
inventory management is effective and inventory turnover is as expected.

Days Payable Outstanding (DPO): DPO figures are consistent with budget, indicating the
company is paying its suppliers according to expected schedules, which could be leveraged for
better credit terms.

Overall CCC: The overall CCC shows the company takes longer to convert its investments in
inventory and other resources into cash flows from sales compared to the budget. The operating
cycle's variance, particularly in the earlier months, suggests a lag in efficiency and potential areas
to streamline operations.
Percentage of LTM Revenue:

Variance Analysis: The actual NWC as a percentage of LTM revenue is consistently higher than
budgeted, which could be a red flag for potential cash flow issues. It's imperative to dive
deeper into why this variance exists and ensure that sales growth is not being stifled by cash
tied up in working capital.

COGS (Excluding Payroll):

The actual COGS excluding payroll are in line with the budget, which indicates good cost
management. However, the focus should remain on optimizing cost structure to improve
overall margins.

LTM Revenue Forecast vs. Budget:

There's a gap between the forecast and budget figures, with forecasted LTM revenue typically
lower than budgeted. This may suggest either conservative forecasting or underperformance
against targets, warranting further examination of sales strategies and market conditions.

Conclusion & Recommendations:

Cash Management: Immediate attention should be given to improving the cash conversion
cycle, particularly around AR collections.

Sales and Operations Planning: Sales forecasting and operations should be reviewed to
ensure alignment with financial planning, focusing on inventory turnover and AR collection
days.

Cost Control: Continuously monitor COGS and maintain vigilance over expense management,
seeking opportunities for cost savings without sacrificing quality or operational capacity.

Strategic Decision-Making: Use these insights to inform strategic decisions, ensuring that
WC components are optimized to support both short-term liquidity and long-term financial
health.

This analysis should serve as a steppingstone to further investigative work, with more
granular data dives and cross-departmental discussions to ensure that the company's
working capital is being utilized in the most efficient manner possible.
Ana Hernandez: Open to Work
If you found value in this content and feel inclined to share, I would appreciate your kindness. I
invite you to visit my profile and reach out at your convenience.

Contact:
Mobile: +52 4443 291519
Email: anahernandezlob@outlook.com

Interested in the full Excel model?

Please feel free to contact me directly. While I am transitioning to my next professional challenge, I
am offering online training courses on various financial topics, including Working Capital
management. I am at your service.

Ana Hernández: Disponible para Trabajar

Si este contenido fue de su interés y decide compartirlo, estaré
agradecida por su gesto. Le invito a visitar mi perfil y contactarme
cuando lo desee.

Contacto:
Móvil: +52 4443 291519
Correo: anahernandezlob@outlook.com

¿Interesado en el modelo completo en Excel?

No dude en contactarme directamente. Mientras avanzo hacia mi
nuevo reto profesional, ofrezco cursos de formación en línea
sobre diversos temas financieros, incluida la Gestión del Capital
de Trabajo. Estoy a sus órdenes.