Working capital calculator: operating working capital and cash conversion cycle
Enter revenue, cost of sales, receivables, inventory and payables to see your operating working capital, DSO, DIO and DPO, and how long cash is tied up.
Short answer
Net working capital = current assets − current liabilities. Operating working capital = receivables + inventory − payables. A wholesaler with 300,000 of receivables, 180,000 of inventory and 120,000 of payables has 360,000 of operating working capital: 15% of 2.4 million in yearly revenue. As revenue grows, that need grows with it.
Working capital calculator
Revenue and cost of sales for one year from the profit and loss account, the balances at that year end. Any currency works.
- Days sales outstanding (DSO)
- 45.6 days
- Days inventory outstanding (DIO)
- 45.6 days
- Days payables outstanding (DPO)
- 30.4 days
- Cash conversion cycle
- 60.8 days
- Working capital as % of revenue
- 15.0%
- Operating working capital
- 360,000
Working capital formulas
| Measure | Formula | Example |
|---|---|---|
| Net working capital | current assets − current liabilities | see the current ratio calculator |
| Operating working capital | receivables + inventory − payables | 300,000 + 180,000 − 120,000 = 360,000 |
| Days sales outstanding (DSO) | receivables ÷ revenue × 365 | 300,000 ÷ 2,400,000 × 365 = 45.6 |
| Days inventory outstanding (DIO) | inventory ÷ cost of sales × 365 | 180,000 ÷ 1,440,000 × 365 = 45.6 |
| Days payables outstanding (DPO) | payables ÷ cost of sales × 365 | 120,000 ÷ 1,440,000 × 365 = 30.4 |
| Cash conversion cycle | DSO + DIO − DPO | 45.6 + 45.6 − 30.4 = 60.8 days |
Net working capital comes straight from the balance sheet and says something about liquidity; work it out with the current ratio calculator. Operating working capital leaves out cash and loans and looks only at money tied up in trading: what customers still owe you and what sits on the shelf, minus what you still owe suppliers.
Divide receivables by revenue, and inventory and payables by cost of sales. Strip VAT from the receivables balance, or use revenue including VAT; otherwise DSO looks longer than it is.
What the cash conversion cycle tells you
The cash conversion cycle is the number of days between paying your supplier and your customer paying you. In the example it is 60.8 days. For all those days the business funds its own trading, with its own money or an overdraft.
| Business | Typical cash conversion cycle |
|---|---|
| Supermarket, web shop with prepayment | Negative: customers pay before suppliers are paid |
| Professional services | 30 to 60 days, mostly receivables |
| Wholesale | 45 to 90 days |
| Construction and installation | Varies widely with work in progress and stage payments |
Growth costs working capital. If the wholesaler grows revenue by 20% with the same days, operating working capital grows by 20% of 360,000 = 72,000. That money has to be there before the extra profit comes in. How it plays out over the coming weeks shows in a cash flow forecast.
Worked example: a wholesaler
A fictional wholesaler has these figures for the past year and on its closing balance sheet. The calculator starts with them.
| Item | Amount or days |
|---|---|
| Revenue | 2,400,000 |
| Cost of sales | 1,440,000 |
| Receivables | 300,000 (45.6 days) |
| Inventory | 180,000 (45.6 days) |
| Payables | 120,000 (30.4 days) |
| Operating working capital | 360,000 |
| Cash conversion cycle | 60.8 days |
If the wholesaler brings DSO down from 45.6 to 35 days, 10.6 ÷ 365 × 2,400,000 ≈ 70,000 is released. That pays for almost all the extra working capital that 20% growth needs.
How to reduce working capital
- Collect receivables faster. Invoice straight away and chase overdue items weekly. Work out your DSO with the DSO calculator; tips are in improving accounts receivable.
- Hold less stock. Check turnover per item and clear slow-moving stock.
- Agree payment terms with suppliers. Longer terms lower working capital, but pay on time: an early-payment discount can be worth more.
- Stage payments and deposits. On projects, a payment schedule lets the customer share the funding.
Getting the figures from your accounts
Receivables, inventory and payables are on the balance sheet, revenue and cost of sales in the profit and loss account. Take the balances on the same date. Connect Xero, QuickBooks Online or Exact Online to DigiData and the financial dashboard shows DSO, overdue items and working capital per month without exports.
Frequently asked questions
What is the difference between net and operating working capital?
Net working capital is current assets minus current liabilities, straight from the balance sheet. Operating working capital is what trading needs: receivables plus inventory minus payables. Lenders look at both.
Is negative working capital bad?
Not always. A supermarket or subscription business that is paid in advance often has negative operating working capital: customers fund the business. For a company that sells on credit, negative net working capital is a sign that cash is tight.
Why divide inventory by cost of sales and not revenue?
Because inventory sits on the balance sheet at cost. Dividing it by revenue makes stock look faster than it is, because revenue includes your margin.
How much working capital do I need?
Express operating working capital as a percentage of revenue and compare it with previous years. When you grow, you need roughly that percentage of the extra revenue, unless you change your DSO, DIO or DPO.
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