anyone got a proper worked example of overtrading / the funding gap?

3 answers

• hi, resitting FM eh, the funding gap calc always feels like a sneaky 3-4 marker imo. the days to £ conversion people mess up is just forgetting what base you multiply the days against. receivables = sales x (receivable days/365). inventory = COGS x (inventory days/365). payables = COGS x (payable days/365). so if sales go up 20%, you have to work out COGS first (they'll give you gross margin % or the COGS number). then you calc working capital at the old level and at the new level, difference is the funding gap. quick dirty example: old sales £100, GP margin 25% so COGS £75. old receivables 100x60/365=16.44, inventory 75x30/365=6.16, payables 75x45/365=9.25. new sales 120, COGS 90. new receivables 120x60/365=19.73, inventory 90x30/365=7.40, payables 90x45/365=11.10. extra funding needed = (19.73-16.44)+(7.40-6.16)-(11.10-9.25)=2.68. in the exam just set it out exactly like that, don't try to skip steps and use a single formula, you'll drop easy marks. do the overtrading QB questions twice and it'll stick. cheers

  Danny R. · 2mo ago

  0 votes

• Good breakdown on the calcs above. Just to add a slightly more case-study angle, the funding gap number only tells you the quantitative working capital impact assuming the days stay constant. In a fuller question, and definitely in the Advanced Case Study, you often have to challenge whether those receivable, inventory and payable days are actually realistic once the business is growing that fast. 20% top-line growth might stress credit control, lead to slower collections, or result in suppliers tightening terms, so the real funding gap can be worse than the simple pro-rata maths. When I sat FM, the examiner seemed to love following the calc with a "comment on the risks" instruction, so having that qualitative layer ready straight after your numbers can pick up marks you would otherwise leave on the table. If your AI gives any liquidity constraints or industry benchmarks, that is exactly the sort of thing to tie into your judgement around whether the calculated gap is financeable. Cheers

  Grace W. · 2mo ago

  0 votes

• Quick one to add to the numbers above, the step that tripped me up on my first sit was which base to use for inventory and payables days. Receivables goes on sales, as you'd expect, but inventory and payables both go on cost of sales (or purchases if the question gives it, though at Certificate it's usually COGS). I kept accidentally plugging sales into inventory and completely distorting the working capital swing. Also make sure you remember that payables are a deduction when you add it all up, so the funding gap is (rise in receivables + rise in inventory) minus (rise in payables), not the sum of all three. If your answer feels miles off, double check you haven't turned payables into a positive number in the net working capital calc. cheers

  Priya K. · 2mo ago

  0 votes