Working capital: How we calculate
Estimate working capital and the cash conversion cycle.
How we calculate
Operating working capital = inventory + trade receivables − trade payables. Cash and financing liabilities are excluded. Inventory days (DIO) and supplier payment days (DPO) use cost of sales; customer payment days (DSO) use revenue. Cash cycle = DIO + DSO − DPO. Use representative inventory, receivables and payables balances, with revenue, cost of sales and days from the same period. The model does not calculate average balances for you.
What the figures mean
- Days of inventory (DIO)
An estimate of how many days of activity the inventory represents. Inventory, cost of sales and period length must use comparable bases.
Simple example: A result of 30 days means about one month of inventory at the entered sales pace.
- Days to collect customer payments (DSO)
An estimate of the days between sales and payment collection. Customer receivables and revenue must use comparable periods.
Simple example: A result of 45 days represents roughly a month and a half before customers’ money arrives.
- Days to pay suppliers (DPO)
An estimate of days before supplier payment from payables relative to cost of sales. Use comparable figures from the same period.
Simple example: A result of 20 days represents approximately a twenty-day payment interval with the entered figures.
Worked example
These illustrative inputs let you check the method. They are not figures for a real company or automatically current tax rates.
Inputs
- Inventory
- 50,000
- Trade receivables
- 80,000
- Trade payables
- 40,000
- Period revenue
- 600,000
- Cost of sales
- 400,000
- Days in period
- 365
Results
- Cash cycle · days
- 57.7917
- Operating working capital
- 90,000
- Inventory days (DIO)
- 45.625
Change assumptions in the calculator and compare outcomes. Money follows your input unit; figures from different periods need adjustment before comparison.