ACCA FM Syllabus C. Working Capital Management - Calculating the cost of WC funding - Notes 5 / 5
Calculating the cost of WC funding
Basically the inventory and the receivables need to be financed somehow, either by an overdraft (1st) or by a long term loan (2nd)
I guess even that’s not strictly true as they are firstly financed by
any trade payables (free)
then any bank overdraft
then any long term finance
Illustration
Calculate the cost of the investment in working capital
| Inventory | 800 |
| Receivables | 400 |
| Payables | 300 |
| Overdraft (10%) | 200 |
| Long term finance | 15% |
Calculate the cost of the investment in working capital
Total Cost = 125
| Amount | Cost | |
| Inventory + receivables | 1200 | |
| Payables | (300) | - |
| Overdraft (10%) | (200) | 20 |
| Long term Finance (15%) | (700) | 105 |