Capital Employed

This time I shall put up a new column on “Corporate Finance” and let discuss about capital employed as this is a key topic under such economic situation.
So what is capital employed? In simple it is the capital you used to fund the operation of the Company.. well it made up of two simple elements which is the capital that you invest and the financing you obtain to run the business. To be academic for your understanding, it is your capital financing and your debt financing or in another way to explain is the Shareholder equity plus your long term liability.
The word finance can easily mean the cash you need to fund the business. So from your financial data how are you going to examine it? My advice is you do it step by step. First of all prepare your budgeted profit and loss account and check out three important item in you profit and loss account. First you sales; secondly your profit and thirdly any extraordinary item.
With that in mind prepare a pro-forma balance sheet based on your budgeted profit and loss account. In your pro-forma balance sheet include your capital expenditure for the coming year. Look for a company to continue operation, it is impossible to take out CAPEX but to reduce or manage CAPEX. Then you will find a gap in the pro-forma balance sheet as the balance sheet will not balance as something will be missing.
Split your pro-forma balance sheet into 5 parts which is
1. Non Current Asset
2. Current Asset - taking away deposit, prepayment and other non monetary item.
3. Current Liability- taking away non monetary item.
Add the three items above and less the following:
Long term liabilities and the shareholder equity
If the balance is positive mean you need to more funds injected and if the balance is negative then it is fine as the capital employed is sufficient.
Well the next thing you need to have a close examination is your short term liquidity by looking at you working capital cycle by calculating your stock turnover days add debtor turnover days and less your creditor days. You could also evaluate it by value. This help to view the healthiness of your working capital and bear in mind this evaluation does not include your CAPEX evaluation.
Try it will give you a good indication on your cash requirement.