If working capital investment like inventories and receivables are considered as inputs then what can be considered as output? One can be sales or revenues. What else?
Dear Utkarsh,
outputs of any investments cannot be measured directly, because it is not possible to attribute outputs directly to the investments. You will always have to aggregate certain investments to what we call a "cash generating unit" in accounting. For example in a Starbucks Coffee Shop neither the coffee machine (investment) not the coffee beans (working capital) have an output on their own. Only the whole Coffee Shop has an output. Contrary costs can be attributed almost directly to the investment, because depreciation and cost of capital are known numbers of any investment.
Managing the working capital means not only to reduce the working capital best possible to reduce cost of capital. Following the idea of an XYZ-Analysis a good wc-management is a side condition of the optimization of the output of a cash generating unit.
Hope this might helpful to you! Best regards JHM
Didn´t I get your point?
Reduction of Working Capital leads to reduction of Cost of Capital.
Reduction of Working Capital leads to reduction of Service Level.
Reduction of Service Level leads to losses because of unsatisfied customers.
Marginal cost of capital gains due to the reduction of the WC should equal Marginal Service Level losses.
How to calculate the individual Service Level and the Losses from a reduction of the service level depends on the Branch and is different in each individual case.
If this helps you, dont hesitate to cite me ;-)
"Working Capital" is usually defined as accounts receivables, accounts payables and stocks/inventory. Cost of Capital means the cost of financing an investment. Usually the Weighted average Cost of Capital is used to attribute the financing cost to any investment.
As per my knowledge fund available for use is capital. It can be long term or short term. It can be equity financed or debt finance but in all cases it is funds available for use
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