Guide

Working Capital Formula

What is working capital?

Working capital is a financial metric representing a company’s operational liquidity and can be calculated as the difference between current assets and current liabilities. The three key components of working capital are accounts receivable, inventories and accounts payable.

Measuring working capital performance

To understand how well a company is performing in these three areas of working capital – both against one’s past performance and peers – these components are each converted into days by comparing them to the daily average sales or COGS. These metrics are: Days Sales Outstanding (DSO), Days Inventories Outstanding (DIO) and Days Payables Outstanding (DPO).

When combined, they are known as the Cash Conversion Cycle (CCC), which expresses the time it takes to convert investment in inventories into cash flows from sales. Therefore, CCC attempts to estimate for how long capital is tied to the purchasing, manufacturing and sales processes before it is converted into cash receipts.

Working capital performance metrics

 

Working Capital Hub

Access a range of material – guides and articles, checklists, podcasts, webinars, case studies and more – to support your journey to effectively manage and improve your business working capital.