Working Capital and Return on Net Assets

Once a company is satisfied that it can differentiate between profitable and unprofitable products, the profitability measures are easily consolidated in a multidimensional environment to look at the principals/vendors that supply groups of products. The principal profitability (essentially product profitability) model may be grown into a model that incorporates the value of working capital and allow the calculation of required return based on Net Assets employed.

The Working Capital (WC) calculation essentially looks at the value of the interest associated Average Sales Realization, Debtors Days, Creditors Days, and Stockholding Days for market related interest rates. Subsequently, the asset book value is assigned to principals and with the company Return on Net Assets Required percentage, the Return on Net Assets/Margin is calculated.

Utilizing average net selling prices the required commission can be further reduced to required commission percentages which may be evaluated and compared to current commissions being earned. This makes for very useful information when service contracts are re-evaluated.

Example Working Capital and Return on Net Assets Model