why times NWC secured to build up the initial stocks $1,600 MM by 20%?

Question

NWC secured to build up the initial stocks is $1,600MM

it said that NWC per year is 20% of sales and change in NWC is NWC of last fiscal year - NWC of current fiscal year.

$1,600MM is NWC and sales why times 20% to get $320MM and then minus 20% of sales in 2030, $400MM, to get ($80MM)?

It should be $1,600MM directly minus of $400MM for 2030

Answer 1

Hi there,

You are mixing up levels and percentages.

The 20% rule means: NWC each year = 20% of that year’s sales.

So the 1,600 MM is not the NWC itself. It is most likely the sales level used to compute NWC.

If sales are 1,600 MM, then NWC = 20% × 1,600 = 320 MM.

Then, if sales in 2030 are 2,000 MM, NWC in 2030 = 20% × 2,000 = 400 MM.

The change in NWC is calculated as:
Previous year NWC minus current year NWC = 320 minus 400 = minus 80 MM.

That minus 80 MM reflects additional working capital needed because sales increased.

You should not subtract 1,600 minus 400, because 1,600 is sales, not NWC. The 20% rule must be applied first to convert sales into NWC.

Answer 2

hey there :)

The key is that 1,600 MM is sales, not NWC. Since NWC is defined as 20 percent of sales, you first need to convert sales into NWC. So 1,600 MM times 20 percent gives 320 MM of NWC.

Then the change in NWC is calculated as NWC in the current year minus NWC in the previous year. If 2030 sales imply 400 MM of NWC, the change is 320 minus 400, which equals minus 80 MM. That is why you do not subtract 1,600 directly from 400, because 1,600 is not NWC but revenue.

If you want, share the full numbers and we can walk through it step by step.

best,
Alessa :)