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Net working capital ties up project cash before customers pay. Build the investment and recovery schedule, check its signs, and compare the funding effect of different assumptions.
Net working capital in capital budgeting is the cash a project needs to support receivables and inventory after allowing for supplier credit and other operating liabilities. Increases use cash; decreases release it. Include the initial requirement, later changes and the recoverable balance at closeout, each at the date cash moves.
A project can show a healthy operating profit and still require more funding than its equipment invoice suggests. The missing amount often sits in the interval between paying suppliers and collecting customers.
The broad accounting definition of working capital is current assets less current liabilities. For a project investment case, use the incremental operating balances caused by accepting the project.
Project operating net working capital = Incremental operating current assets − Incremental operating current liabilities
Working capital cash flow = −(Closing project NWC − Opening project NWC)
The common simplified version is trade receivables plus inventory less trade payables. Add other operating items, such as project-specific prepayments or accrued operating costs, when they matter. Document which accounts are included so the schedule can be rebuilt from the exports.
Treasury cash and interest-bearing debt usually stay outside this operating calculation. NYU Stern's working capital guidance distinguishes noncash operating assets from cash investments and excludes interest-bearing debt to avoid counting financing twice. A required operating cash balance needs its own stated treatment.
Do not copy the company's entire working capital balance into a small project case. Compare the business with the project against the business without it. Shared balances belong in the case only to the extent that accepting the project changes them.
Start with an invoice register and receivables aging, an inventory valuation report, a supplier invoice register and payables aging. Match reporting dates and use project, product or location identifiers to isolate the relevant activity. Finance should reconcile each included balance to the ledger before using history to justify assumptions.
The forecast then needs a reason for each balance:
| Component | Evidence for the assumption | Question to resolve |
|---|---|---|
| Receivables | Credit sales, collection history, customer terms | How much invoiced revenue remains uncollected? |
| Inventory | Stock quantities, unit costs, replenishment plans | What stock must be purchased before demand arrives? |
| Payables | Supplier purchases, payment history, agreed terms | How much of that stock remains unpaid? |
| Other operating items | Account detail and contract terms | Does the project change the cash requirement? |
Use a net working capital schedule for the detailed balance rollforward. Measures such as working capital days help test the timing assumptions; they do not replace the dollar cash requirement.
Give assumptions to the people who can verify them. Credit owns collection expectations, operations owns required stock, procurement confirms supplier terms, and FP&A assembles the project cash schedule. Treasury uses the dates to assess funding availability.
A US industrial distributor proposes a dedicated product line with equipment costing $300,000. The line operates for three years. Assume operating cash after taxes, but before changes in working capital, is $180,000 each year. There are no further equipment outlays or equipment sale proceeds in this illustration.
The operating balances below must be available before the corresponding year's activity. All amounts are exact whole dollars; no rounding is required.
| Operating year supported | Receivables (USD) | Inventory (USD) | Payables (USD) | Required NWC (USD) |
|---|---|---|---|---|
| Year 1 | 70,000 | 60,000 | 50,000 | 80,000 |
| Year 2 | 85,000 | 70,000 | 60,000 | 95,000 |
| Year 3 | 100,000 | 80,000 | 70,000 | 110,000 |
The first balance is 70,000 + 60,000 − 50,000 = $80,000. The next two are $95,000 and $110,000. Each increase is $15,000.
Assume all receivables are collected, inventory converts to cash at its carrying amount and suppliers are paid at the end of Year 3. Under that explicit assumption, the entire final $110,000 is recoverable.
| Cash date | Equipment cash flow (USD) | Operating cash before NWC (USD) | NWC cash flow (USD) | Total project cash flow (USD) |
|---|---|---|---|---|
| Start, before Year 1 | -300,000 | 0 | -80,000 | -380,000 |
| End Year 1, funding Year 2 | 0 | 180,000 | -15,000 | 165,000 |
| End Year 2, funding Year 3 | 0 | 180,000 | -15,000 | 165,000 |
| End Year 3, after closeout | 0 | 180,000 | 110,000 | 290,000 |
| Total | -300,000 | 540,000 | 0 | 240,000 |
The starting cash requirement is $380,000, rather than just the equipment's $300,000. Working capital consumes cash before activity begins and releases it only after the operating cycle closes. Damodaran's project cash-flow guidance specifically warns against subtracting the full balance every year and placing advance working capital investment after the revenue it supports.
The working capital cash column must satisfy this identity:
Cumulative NWC cash flow = Starting NWC before investment − Ending NWC after closeout
Here, −80,000 − 15,000 − 15,000 + 110,000 = $0. The project starts and ends with no operating working capital tied up. Separately, $540,000 of operating cash less $300,000 of equipment outlays equals the $240,000 undiscounted net cash total.
That does not mean working capital has no economic effect. Cash leaves earlier than it returns. The amount and timing affect funding and discounted value even when the undiscounted working capital column sums to zero. The capital versus operating budget guide covers the investment appraisal methods applied to the completed schedule.
Suppose the distributor expects $20,000 more receivables in every operating year, with inventory, payables and operating cash unchanged. Required NWC becomes $100,000, $115,000 and $130,000.
| Cash date | Original project cash flow (USD) | Higher-receivables cash flow (USD) | Difference (USD) |
|---|---|---|---|
| Start | -380,000 | -400,000 | -20,000 |
| End Year 1 | 165,000 | 165,000 | 0 |
| End Year 2 | 165,000 | 165,000 | 0 |
| End Year 3 | 290,000 | 310,000 | 20,000 |
| Total | 240,000 | 240,000 | 0 |
The annual increases remain $15,000, but the project needs an extra $20,000 at launch. The additional release comes only at closeout. Finance must decide whether that funding commitment is acceptable and whether the assumed collection is credible.
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A project may need inventory before its first sale and may have to wait for customers to pay. Supplier credit offsets part of that requirement. The remaining operating balance must be funded when it arises, even though it is not an equipment purchase.
No. Recovery depends on collecting receivables, selling remaining inventory and paying operating liabilities. Bad debts, unsalable stock and continuing operations can prevent full release. Use a dated closeout estimate rather than assuming every balance becomes cash immediately.
A typical unlevered project analysis excludes treasury cash and interest-bearing debt because financing is assessed separately. Include a specifically required operating cash balance only under a clearly stated convention, and use that convention consistently throughout the project schedule.