The ACCA AFM examiners have commented on several occasions within their reports that students struggle to deal with the working capital cash flows in ACCA AFM questions.

This blog is designed to ensure we put this right.

Working capital cash flows can appear in 3 syllabus areas.

Advanced Investment Appraisal

This is the most common place and where the main complaints have been.

With this in mind, I have prepared a video that explains the concepts behind WC cash flows in project appraisal & the variety of ways it has been tested.

Keep in mind WC cash flows are the last row before you produce the free cash flows for the project.

Business Valuations

The WC cash flows are deductions to arrive at the future FCFCoor FCFE. The examiners state exactly how to compute these. Normally they are a % of sales.

Unlike with investment appraisal, there is no final year closing off on the WC cash flows. They will be included with the future FCFCo or FCFE used in the delayed perpetuity with growth calculation.

Dividend Capacity

Finally, WC cash must be deducted to find the dividend capacity (FCFE). Again, the question will specify the method – most likely based upon sales or change in sales.