Working Capital Requirement
How much cash your operation needs standing still — and what growth will cost.
Replaces: Bank facility sizing exercises and CFO consulting
How to use it
Enter your revenue, your cost ratio, and how long money sits in each stage of the cycle. The calculator converts those days into the cash they represent, and shows how much more the operation will swallow as it grows.
Where the number comes from
- Receivables are daily revenue multiplied by the days customers take to pay.
- Inventory is daily cost of goods multiplied by the days stock is held — cost, not selling price, because that is what you paid for it.
- Payables are daily cost of goods multiplied by the days you take to pay, and they reduce the requirement because suppliers are financing you.
- The requirement is receivables plus inventory minus payables — cash permanently committed to the cycle.
- Growth scales the requirement in proportion to revenue, since a bigger operation holds proportionally more of everything.
What goes wrong
The part most calculators leave out.
- The requirement scales with revenue only if the cycle stays constant. Growing by winning larger customers with longer payment terms makes it grow faster than revenue does.
- Annual averages hide the peak. A seasonal business needs enough working capital for its worst month, not its average one, and financing sized to the average will fail exactly when it is needed.
- Payables reduce the requirement on paper, but stretching suppliers is borrowing from people who can stop supplying you. It is the least reliable funding on the balance sheet.
- This ignores cash buffers, capital expenditure and debt service. It sizes the operating cycle, not the whole funding need.
- A negative requirement is a real structural advantage, but it makes shrinking dangerous: a business funded by customer prepayments has to repay that float if volumes fall.
The growth that has to be financed
A distributor turns over 9m at 62% cost of goods, collects in 52 days, holds 38 days of stock and pays suppliers in 34 days. Receivables come to about 1.28m, inventory to 581,000, and payables fund 520,000 of it — a working capital requirement near 1.34m, or 14.9% of revenue. That money is permanently unavailable. Now plan 30% growth: the requirement grows in proportion and absorbs a further 402,000 of cash in year one. The business is profitable throughout and still needs a facility, because growth in a positive-cycle business consumes cash before it produces any.
Questions
- What is the difference between working capital and the cash conversion cycle?
- The cycle measures the gap in days; the requirement converts those days into money. The cycle tells you how efficient the operation is, the requirement tells you how much funding it needs.
- Why does growth need funding if I am profitable?
- Because each new sale ties up cash in stock and receivables before it returns any. Grow fast enough and the working capital consumed exceeds the profit generated, so the bank balance falls while the income statement improves.
- How do I reduce the requirement?
- Collect sooner, hold less stock, or pay later — in that order of safety. The first two improve the business; the third shifts the burden onto suppliers and has a limit.
- Does anything I type get sent anywhere?
- No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.
Last updated .
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