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Explanation of Breakeven Analysis

TKMC Case: Portfolio expansion in the material trade business
Neue Antwort am 1. Sept. 2023
4 Antworten
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Michael fragte am 17. März 2023

Hello,

Will someone please explain to me how NWC and Cumulative BCF are being calculated in the initial break-even analysis? I don't understand how the 20% of sales NWC is being accounted for each year and how that is being factored into the calculation. 

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Ian
Experte
Content Creator
bearbeitete eine Antwort am 18. März 2023
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

Actually, this questions was already asked in German here!

https://www.preplounge.com/en/consulting-forum/nwc-15084

Here's the translation from coach Hagen:


“The NWC for building up the opening stock is EUR 320 million. Furthermore, it is shown that the NWC is always 20% of the turnover. So if there is a turnover of EUR 2,000 million in 2025, 20% of this is EUR 400 million. Since the change in the NWC is calculated by taking the old value and subtracting the new one from it, i.e. EUR 320 million - EUR 400 million, you arrive at a EUR -80 million change in the NWC.”

(editiert)

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Michael am 19. März 2023

Hi Ian, Thanks for clarifying. There are still a few things I don't understand about the case. I might be missing a key assumption. If the change in net working capital is defined as [NWC of last fiscal year] - [NWC of the current fiscal year]. Why is NWC for 2026 and 2027 -80? If NWC from 2015 is -80 and NWC of 2026 is 20% of 2,402, then why isn't NWC for 2026 = -80 - 480 = -560? How should I be interpreting the fact that NWC per year is 20% of sales? Also if the initial investment is 320M + 100M = 420M how does the sum of EBITDA for the first 3 years of operation equivalent to 360M cover the 420M initial investment? Am I supposed to be using NWC as a current asset against the initial investment? Please help me understand the trends in NWC and why it's subtracted against EBITDA to determine business cash flow. I thought NWC was already accounted for in COGS + OH. Thank you for your time.

Hagen
Experte
Content Creator
antwortete am 19. März 2023
#1 Bain coach | >95% success rate | interviewer for 8+ years | mentor and coach for 7+ years

Hi Michael,

I think this is an interesting question that may be relevant for many people. I would be happy to share my thoughts on it:

  • First of all, given the number of questions both from you and other candidates, I feel the case study might lack clarity. As such, I would advise you not to worry too much about those rather complicated and unintuitive calculations.
  • Moreover, in addition to what I answered in this thread, given that NWC is 20% of sales, if sales from 2025 to 2026 to 2027 will increase by approximately $400m, the change in NWC will be 20% of this, i.e., -$80m.

If you would like a more detailed discussion on how to address your specific situation, please don't hesitate to contact me directly.

Best,

Hagen

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Cristian
Experte
Content Creator
antwortete am 31. Juli 2023
#1 rated MBB & McKinsey Coach

Hi there,

FYI - the level of complexity here is higher than what you can expect in the average interview. Just so you don't assume that all interviews will be like that. 

Best,
Cristian

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Clara
Experte
Content Creator
antwortete am 1. Sept. 2023
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Precisely for the high amount of questions (1) asked by my coachees and students and (2) present in this Q&A, I created the “Economic and Financial concepts for MBB interviews”, recently published in PrepLounge’s shop (https://www.preplounge.com/en/shop/prep-guide/economic_and_financial_concepts_for_mbb_interviews).

After +5 years of candidate coaching and university teaching, and after having seen hundreds of cases, I realized that the economic-related knowledge needed to master case interviews is not much, and not complex. However, you need to know where to focus! Hence, I created the guide that I wish I could have had, summarizing the most important economic and financial concepts needed to solve consulting cases, combining key concepts theorical reviews and a hands-on methodology with examples and ad-hoc practice cases.

It focuses on 4 core topics, divided in chapters (each of them ranked in scale of importance, to help you maximize your time in short preparations):

  • Economic concepts: Profitability equation, Break even, Valuation methods (economic, market and asset), Payback period, NPV and IRR, + 3 practice cases to put it all together in a practical way. 
  • Financial concepts: Balance sheet, Income statement/P&L and Performance ratios (based on sales and based on investment), +1 practice case
  • Market structure & pricing: Market types, Perfect competition markets (demand and supply), Willingness to pay, Pricing approaches, Market segmentation and Price elasticity of demand, +1 practice case
  • Marketing and Customer Acquisition: Sales funnel, Key marketing metrics (CAC and CLV) and Churn, +1 practice case

Feel free to PM me for disccount codes for the guide, and I hope it helps you rock your interviews! 

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