Working capital in days: receivables, inventory, payables and the cash conversion cycle
Turn the balance sheet into days, find the cash freed by each day saved, see why growth eats cash, and meet a company whose suppliers fund it.
Key takeaways
- Turn working capital into days and you can see how long cash is tied up between paying suppliers and being paid by customers, and exactly how much cash each day saved would free.
- Common mistakes: Dividing inventory or payables by revenue instead of cost of goods sold.
- Days sales outstanding (DSO), how long customers take to pay: receivables divided by revenue, times 365.
- Days inventory outstanding (DIO), how long stock sits before it is sold: inventory divided by cost of goods sold, times 365.
- Days payables outstanding (DPO), how long the company takes to pay suppliers: payables divided by cost of goods sold, times 365.
Key idea
Turn working capital into days and you can see how long cash is tied up between paying suppliers and being paid by customers, and exactly how much cash each day saved would free.
Four formulas (days in a year: 365)
- Days sales outstanding (DSO), how long customers take to pay: receivables divided by revenue, times 365.
- Days inventory outstanding (DIO), how long stock sits before it is sold: inventory divided by cost of goods sold, times 365. Use cost of goods sold because stock is recorded at cost.
- Days payables outstanding (DPO), how long the company takes to pay suppliers: payables divided by cost of goods sold, times 365.
- Cash conversion cycle (CCC) = DSO + DIO minus DPO: the number of days cash is tied up in each turn of the business.
| Line | Amount |
|---|---|
| Revenue for the year | 3,650 |
| Cost of goods sold for the year | 2,190 |
| Receivables at year end | 450 |
| Inventory at year end | 360 |
| Payables at year end | 240 |
So-what
Working capital here is 450 plus 360 minus 240, which is IDR 570 billion tied up in running the business.
Worked case
How much cash is hiding in working capital?
The prompt
The food maker in the table above is short of cash. The finance director asks how long cash is tied up today, and how much cash it would free if customers paid 10 days faster.
The structure
- Cash freed = days saved x cash per day (this comes from the question: days are the lever, cash is the goal)
- Today: DSO, DIO and DPO, then the cash conversion cycle
- Cash per day: revenue per day for receivables, cost of goods sold per day for inventory and payables
- Cash freed by 10 fewer days of receivables
Working it through
1. DSO
Receivables 450 divided by revenue 3,650, times 365.
DSO (days):450 ÷ 3,650 × 365 = 452. DIO
Inventory 360 divided by cost of goods sold 2,190, times 365.
DIO (days):360 ÷ 2,190 × 365 = 603. DPO
Payables 240 divided by cost of goods sold 2,190, times 365.
DPO (days):240 ÷ 2,190 × 365 = 404. Cash conversion cycle
DSO plus DIO minus DPO.
Cash conversion cycle (days):45 + 60 - 40 = 655. Revenue per day
One day of receivables is worth one day of revenue.
Revenue per day (IDR billions):3,650 ÷ 365 = 106. Cash freed
Ten fewer days of receivables, at 10 billion a day.
Cash freed (IDR billions):10 × 3,650 ÷ 365 = 100
The recommendation
Cash is tied up for 65 days today, and getting customers to pay in 35 days instead of 45 would free about IDR 100 billion of cash once, without borrowing. This is because each day of receivables holds one day of revenue, about IDR 10 billion. The same logic says 10 fewer days of stock would free about IDR 60 billion, since one day of cost of goods sold is about 6 billion. The risk is that pushing large retail customers to pay faster costs sales or discounts. As a next step, rank customers by how late they pay and start with the largest.
Risks: Large retailers may refuse shorter terms or ask for a discount in return; Cutting stock too far can lead to empty shelves.
Growth eats cash
When sales grow, receivables and inventory usually grow with them, so a growing company needs more working capital every year. A quick rule: extra working capital needed is roughly working capital as a share of sales, times the extra sales. A business whose working capital is 20 percent of sales needs 20 cents of cash for every extra dollar of yearly sales, before it earns a cent of profit on them.
A machine-parts maker in Germany has working capital equal to 20 percent of its sales. Sales grow from EUR 500 million to EUR 650 million. Roughly how much extra cash does working capital absorb, in EUR millions?
Negative working capital: when suppliers fund the business
Some businesses are paid by customers before they pay their suppliers: supermarkets and fast-fashion chains that sell stock within weeks, airlines that sell tickets months before the flight, and software firms that bill a year in advance. Their working capital is negative, and growth brings cash in instead of using it. A real example: Inditex, the Spanish owner of Zara, reported on 31 January 2026 inventories of EUR 3,249 million and trade and other receivables of EUR 1,166 million, against trade and other payables of EUR 8,587 million. Its own figure for operating working capital was minus EUR 4,173 million (Inditex FY2025 results, checked 2026-10-01).
From the Inditex figures above (EUR millions): inventories 3,249, trade and other receivables 1,166, trade and other payables 8,587. What is operating working capital? (Inditex reports minus 4,173 because each line is rounded to the nearest million.)
Dividing inventory or payables by revenue instead of cost of goods sold. Treating "trade and other payables" as supplier bills only: it often includes taxes, staff costs owed and customer deposits, so read the notes before turning it into supplier days. Using one year-end date for a seasonal business: stock can be low on the last day of the year, so use an average where you can. Assuming stretching suppliers is free: they may raise prices or stop delivering on time.
Revenue is 730 a year and receivables are 60. What is DSO?
Which change shortens the cash conversion cycle?
Why can a supermarket chain grow without needing much extra cash for working capital?
Facts checked against sources on 2026-10-01. Sources, company filings and standard setters first.
- Inditex: FY2025 Results (1 February 2025 to 31 January 2026), results release with consolidated income statement, balance sheet and cash flow statement: https://www.inditex.com/itxcomweb/api/media/1da2c9d1-dbca-49fb-9563-982a8a27fae6/INDITEXFullYear2025.pdf
- Inditex: investors page (results, presentations and annual accounts): https://www.inditex.com/itxcomweb/en/investors
Sources for this lesson (2)
- Recognized public explanations of case-interview concepts and terms
- Inditex: FY2025 Results (1 February 2025 to 31 January 2026), results release with consolidated income statement, balance sheet and cash flow statement
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