Working capital
The money a business has tied up in the day-to-day running of operations. Three things drive it:
- Inventory - raw materials, work-in-progress, finished goods sitting in the warehouse.
- Trade receivables - money customers owe but haven't paid yet.
- Trade payables - money the company owes suppliers but hasn't paid yet.
The formula
Working capital = Inventory + Trade receivables − Trade payablesA positive working capital means the company is funding its operations - its cash is locked up in stock and in waiting for customers to pay. A negative working capital (rare, common in FMCG, organised retail, and aggregator platforms) means suppliers are funding the company - it collects from customers fast and pays suppliers slowly.
Days metrics - the better way to read it
Absolute working capital grows with revenue. To compare apples-to-apples across periods, convert to days:
- Inventory days = (Inventory ÷ COGS) × 365 - how many days of cost is sitting in stock
- Receivable days = (Trade receivables ÷ Revenue) × 365 - how long customers take to pay
- Payable days = (Trade payables ÷ COGS) × 365 - how long the company takes to pay suppliers
- Cash conversion cycle = Inventory days + Receivable days − Payable days