Projecting Working Capital
Forecast NWC with days-ratios (DSO, DIH, DPO) or a quick % of sales. The ratios reveal how efficiently a company runs.
- ✓Use DSO, DIH, and DPO to project working capital
- ✓Choose between the detailed and quick-and-dirty methods
To project you forecast its components. The professional way uses days ratios that translate each balance into 'how many days of sales/COGS does this represent?' - which makes the assumptions intuitive and comparable across companies.
| Ratio | Formula | Reads as |
|---|---|---|
| - | A/R / Sales × 365 | Days to collect from customers (lower = faster cash) |
| - | Inventory / COGS × 365 | Days to sell inventory (lower = leaner) |
| - | A/P / COGS × 365 | Days to pay suppliers (higher = better terms) |
Once you assume a , , and for each forecast year (anchored on history and outlook), you back out the projected A/R, inventory, and A/P - and from those, and its change.
- ›Project each component via days ratios
- ›Lets you toggle individual drivers
- ›Preferred when you have the data
- ›Essential when one item dominates (e.g. slow-paying government A/R)
- ›Project total as a % of sales
- ›Compute the year-over-year change
- ›Used when detailed data is missing
- ›Fast, but hides the individual levers
Falling and with stable or rising is a company getting more efficient - collecting faster, holding less inventory, paying suppliers later. That's a working-capital tailwind to .
Annual sales are $3,650mm and A/R is $400mm. What is DSO?