Working capital and cash cycle
General calculation · any country
Money sitting in unpaid invoices and in stock is not in the bank. Measure how many days your business takes to turn sales into cash and how much you would free up by improving your terms.
Cash cycle
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Collection days
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Inventory days
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Payment days
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Working capital
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How it is calculated
- Collection days = accounts receivable ÷ annual sales × 365.
- Inventory days = inventory ÷ annual cost of sales × 365. Payment days = accounts payable ÷ annual cost of sales × 365.
- Cash cycle = collection days + inventory days − payment days. Operating working capital = receivables + inventory − payables.
Assumptions
- Balances at a given date (or yearly averages) and activity spread evenly over the year.
- A 365-day year.
- Cash freed by collecting sooner = daily sales × days of improvement.