Accounting interview question: Working Capital sign
Today we’re tackling a new accounting interview question around WCR. This one comes up a lot in Transaction Services interviews, but you could also face it in banking or in funds.
How would you approach answering a question about the sign of a clothing retailer’s working capital?
What steps do you typically take when analyzing the Working Capital for a company, regardless of its industry?
When facing a question about the Working Capital sign, it is important to have a method. So rather than focusing on the answer, let’s see how to approach this type of question. Regardless of the sector you choose, you should have a clear protocol. Let’s get started!
Accounting reminder: What is the definition of Working Capital and what does it take into account?
The working capital (WC) represents the amount of cash flow that is needed to support a company’s operational activities. It is calculated as the difference between the cash received and the cash disbursed. The formula for WC is:
WC = Inventories + Receivables (trade and other receivables) – Non-financial debts (Supplier debt, tax and social security debts)
What is the method for answering questions about the sign of the WCR in an interview?
When answering a question about Working Capital, it is important to understand the components that make up the WC and their impact on cash flow. This involves analyzing the main components. To do this, we need to look primarily at:
- Supplier debt (and other non financial debts)
- Trade and other receivables
- Inventories
By focusing on these factors, it becomes possible to deduce the sign of the WC.
Solution: What is the conclusion about the WC sign for a clothing retailer company
👉 Suppliers are paid prior to selling the final product since the raw materials will have to be obtained and the final product designed before it is sold. So the customer pays well after the supplier has been paid since he will buy the finished product after it arrives in the store.
👉 The company also needs to carry inventory to be able to meet customer needs (multiple models, multiple sizes, and multiple copies), which pulls up the Working Capital.
👉 Therefore, it is very likely that the WC of a textile company is positive
You could have this question for other sectors and businesses so first and foremost remember the method of breaking down the WC and understand the order of cash flows.
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