Working Capital & Cash Conversion Cycle
Analyse how cash moves through receivables, inventory and supplier
payments. Calculate operating working capital, the cash conversion
cycle and the potential cash impact of operational improvements.
1. Annual Financial Data
Use annual credit sales for the DSO calculation.
Used to calculate inventory and payable days.
2. Operational Improvement Scenarios
Enter the expected improvement in days. These are scenario
assumptions, not automatic recommendations. Blank fields count as zero.
Calculate Working Capital
Reset
Practical Example
Consider a trading business with the following annual financial data:
- Annual net credit sales: ₹1,20,00,000
- Annual cost of goods sold: ₹84,00,000
- Average trade receivables: ₹15,00,000
- Average inventory: ₹12,00,000
- Average trade payables: ₹9,00,000
Step 1: Calculate Operating Working Capital
Operating Working Capital = Receivables + Inventory − Payables
= ₹15,00,000 + ₹12,00,000 − ₹9,00,000
Operating Working Capital = ₹18,00,000
This represents the net amount invested in these three operating
balances. It is not the same as total working capital calculated
from all current assets and current liabilities.
Step 2: Calculate the Operating Cycle
DSO: ₹15,00,000 ÷ ₹1,20,00,000 × 365
= approximately 45.6 days.
DIO: ₹12,00,000 ÷ ₹84,00,000 × 365
= approximately 52.1 days.
DPO: ₹9,00,000 ÷ ₹84,00,000 × 365
= approximately 39.1 days.
Cash Conversion Cycle:
45.6 + 52.1 − 39.1 = approximately 58.6 days.
The business takes approximately 59 days to convert its operating
investment in inventory and receivables back into cash, after
accounting for supplier credit.
Step 3: Test Possible Improvements
Suppose management wants to:
- Collect customer payments 5 days faster.
- Reduce inventory holding by 3 days.
- Extend supplier payment terms by 2 days.
Estimated cash release from faster collections:
₹1,20,00,000 ÷ 365 × 5
= approximately ₹1,64,384.
Estimated cash release from reducing inventory:
₹84,00,000 ÷ 365 × 3
= approximately ₹69,041.
Estimated cash release from extending supplier payment terms:
₹84,00,000 ÷ 365 × 2
= approximately ₹46,027.
Total estimated cash release = approximately ₹2,79,452.
The cash conversion cycle would also decrease by 10 days:
5 days from faster collection + 3 days from lower inventory
+ 2 days from additional supplier credit.
How to Use This Calculator
- Enter the annual financial data from the company’s records.
- Use average balances for receivables, inventory and payables.
- Enter proposed improvements in the operational scenario fields.
- Click Calculate Working Capital to view the results.
- Click Reset to clear the fields and test another scenario.
Important: These estimates assume that annual sales
and COGS remain unchanged. Extending payment terms requires supplier
agreement, and reducing inventory must not compromise availability.
The estimated cash release is not additional profit and should not
be interpreted as a guaranteed cash-flow outcome.