Working capital is the cash tied up in running the business: what customers owe you (receivables) plus stock on the shelves (inventory), less what you owe suppliers (payables). Forecasts drive each balance with days, because days stay steady as a business grows:
- DSO = receivables / revenue x 365
- DIO = inventory / cost of goods sold x 365
- DPO = payables / cost of goods sold x 365
Inventory and payables are measured against cost of goods sold, not revenue, because both are carried at cost. To forecast, turn it around: receivables = revenue x DSO / 365.
The cash conversion cycle, DSO + DIO - DPO, is how many days cash is tied up. When working capital grows, cash goes down, so the cash flow line is last year's working capital minus this year's.
Some lenders and companies count a year as 360 days. Keep the day count in one input cell, so changing it changes every formula.