Working Capital & Cash Conversion Cycle

Purpose

This calculator helps assess how efficiently a business converts its operating activities into cash and how changes in customer and supplier payment terms can affect its financing requirement.

It provides two views:

• Actual --- based on the business's actual average inventory, receivables and payables.
• Scenario --- based on the proposed customer and supplier payment terms.

The comparison shows how the proposed terms could change the cash tied up in the business.

Inputs

Annual Sales

Total sales or revenue for one year.

This is used to calculate Days Sales Outstanding (DSO) and the amount of receivables associated with customer payment terms.

Annual COGS

Annual cost of goods sold.

This is used to calculate Days Inventory Outstanding (DIO), Days Payables Outstanding (DPO) and the cash impact of supplier payment terms.

Average Inventory

Average value of inventory held during the period.

A higher inventory balance generally means more cash is tied up before goods are sold.

Average Receivables

Average amount owed by customers.

This represents sales that have been made but not yet collected.

Average Payables

Average amount owed to suppliers.

Supplier credit provides financing for part of the business's operating cycle.

Current Customer Payment Terms

The current contractual payment period for customers, in days.

Scenario Customer Payment Terms

The proposed customer payment period to test.

Increasing this number means customers take longer to pay and generally increases the business's financing requirement.

Current Supplier Payment Terms

The current contractual payment period agreed with suppliers, in days.

Scenario Supplier Payment Terms

The proposed supplier payment period to test.

Increasing this number generally reduces the amount of cash the business needs to finance its operating cycle because suppliers are paid later.

Results

DSO --- Days Sales Outstanding

DSO indicates approximately how many days of sales are tied up in customer receivables.

A higher DSO means cash is collected more slowly.

The Actual DSO is calculated from actual average receivables and annual sales. The Scenario DSO uses the scenario customer payment terms.

DIO --- Days Inventory Outstanding

DIO indicates approximately how many days of COGS are tied up in inventory.

A higher DIO generally means more cash is tied up in inventory.

In this calculator, DIO remains unchanged in the payment-term scenario because inventory assumptions are not changed.

DPO --- Days Payables Outstanding

DPO indicates approximately how many days of COGS are financed by supplier payables.

A higher DPO generally means the business keeps its cash longer before paying suppliers.

The Actual DPO is calculated from actual average payables. The Scenario DPO uses the scenario supplier payment terms.

Cash Conversion Cycle (CCC)

The Cash Conversion Cycle measures the approximate time between paying for operating inputs and collecting cash from customers.

It combines customer collection time (DSO), inventory holding time (DIO), and supplier payment time (DPO).

A shorter CCC generally means less cash is tied up in operations. A longer CCC generally increases the need for working-capital financing.

Operating Working Capital

Operating Working Capital represents cash tied up in the operating cycle:

Receivables + Inventory − Payables

The scenario value estimates the operating working capital requirement after applying the scenario customer and supplier payment terms.

Change

The Change column shows the difference between the Actual and Scenario values.

A positive change in working capital means more cash is tied up in the business.

Additional Financing Required

This is the key scenario result.

It estimates the additional cash financing needed because of the change in customer and supplier payment terms.

For example, if customer terms increase from 45 to 60 days, customers retain cash for an additional 15 days. If supplier terms increase from 30 to 45 days, the business receives an additional 15 days of supplier financing.

The two effects partially offset each other.

• Longer customer terms → more financing required
• Longer supplier terms → less financing required

If the result is positive, additional financing is required.

If the result is negative, the change in terms would release cash rather than require additional financing.

Example

Suppose:

• Annual sales = $1,000,000
• Annual COGS = $600,000
• Customer terms change from 45 to 60 days
• Supplier terms change from 30 to 45 days

The customer-term change ties up additional cash because sales remain uncollected for longer. The supplier-term change releases cash because supplier payments are delayed.

The calculator combines these effects to show the net additional financing requirement.

In the example shown, the result is approximately $16,438.

This means the proposed payment-term changes would require about $16,438 of additional operating financing, assuming sales and COGS remain at the specified levels and inventory does not change.

Important Interpretation

The Actual DSO and DPO are based on actual balance-sheet amounts, while the Scenario DSO and DPO are based on the proposed payment terms.

Therefore, actual DSO can differ from the current contractual customer terms. For example, customers may have 45-day terms but actually pay after 55 days.

This difference can be useful: it indicates whether actual collection or payment behavior is better or worse than the contractual terms.

The calculator estimates the working-capital effect of payment-term changes. It does not forecast changes in sales volume, COGS, inventory levels, bad debts, seasonal effects, interest costs, taxes, or other financing costs.