Working Capital Modelling: A Practical Guide for Finance Teams

Why Working Capital Modelling Matters

Profitable businesses run out of cash all the time — almost always because of working capital. A growing business can have a rapidly expanding working capital requirement that consumes cash faster than profits generate it. Understanding this dynamic is essential for any finance professional managing growth.

The Three Core Metrics

Days Sales Outstanding (DSO): (Trade Receivables / Revenue) x 365. Measures how long customers take to pay. Days Inventory Outstanding (DIO): (Inventory / COGS) x 365. Measures how long stock sits before being sold. Days Payable Outstanding (DPO): (Trade Payables / COGS) x 365. Measures how long the business takes to pay suppliers.

Cash Conversion Cycle

Cash Conversion Cycle = DSO + DIO - DPO. A business with DSO 45, DIO 30, DPO 20 has a cash conversion cycle of 55 days — meaning cash is tied up for 55 days in the operating cycle. Businesses with strong supplier terms and fast-paying customers can achieve a negative cash conversion cycle, where suppliers effectively fund the business.

Building the Model

In a financial model: Trade Receivables = (DSO / 365) x Revenue. Inventory = (DIO / 365) x COGS. Trade Payables = (DPO / 365) x COGS. The movement in each balance from period to period is the working capital cash flow impact — an increase in receivables is a cash outflow, an increase in payables is a cash inflow.

Scenario Sensitivity

Run scenarios: what happens if DSO increases by 10 days? If DPO reduces by 5 days? These sensitivities are critical for treasury planning. Working capital is a core topic in ACCA FM and CIMA Management level.