Estimate how much cash a business must finance while sales move through receivables, inventory, and supplier credit.
| Metric | Amount | Days |
|---|---|---|
| Accounts Receivable | $40,000 | 30.4 |
| Inventory | $40,000 | 30.4 |
| Accounts Payable | $15,000 | 15.2 |
| Net Working Capital | $65,000 | 49.4 |
Working capital is the cash tied up in day-to-day operations. Accounts receivable and inventory consume cash, while accounts payable offsets part of that investment because suppliers are financing some of the operating cycle.
The days-to-finance metric translates balance sheet balances into operating time. If the result is 49 days, the business effectively needs to finance 49 days of sales before the cash returns. Reducing that number releases cash and makes growth easier to fund.
Fast growth can still strain cash if the working capital cycle is long. Every additional dollar of sales may require more receivables and inventory before profit arrives. That is why buyers, lenders, and operators often model working capital before committing to a growth plan or acquisition.
The working capital cycle shows how long cash is tied up in receivables and inventory before suppliers are paid. It is one of the most important deal-screening tools for acquisitions and growing businesses.
Cash conversion cycle equals days sales outstanding plus days inventory outstanding minus days payable outstanding. Net working capital estimates the cash tied up in receivables and inventory after supplier credit.
A longer cycle means more cash is needed to support the same revenue base. Growth can increase that need even when profits look strong.
A company with 45 receivable days, 60 inventory days, and 30 payable days has a 75-day cash conversion cycle. That means cash invested in sales may be tied up for about two and a half months before it returns.
If revenue grows quickly, the company may need more working capital before the income statement shows the full benefit.
In acquisitions, working capital affects the true cash required to close. A deal can be fairly priced on EBITDA and still be undercapitalized if inventory and receivables are not funded.
Use a normalized working-capital peg based on historical monthly balances rather than one clean closing-date snapshot.
Collect faster, invoice earlier, reduce slow inventory, negotiate supplier terms, and align purchasing with demand. Be careful with improvements that damage customer relationships or vendor reliability.
The best improvements reduce trapped cash without starving the business.
Shorter is generally better, but normal levels vary by industry. Distribution, manufacturing, and retail usually require more working capital than software or services.
Supplier credit helps fund operations. More payable days can reduce the cash gap, though stretching vendors too far can create supply risk.
Growth often consumes cash because receivables and inventory rise before customer cash is collected.
Most transactions include a normal level of working capital. If the seller delivers less than normal, the purchase price should usually adjust.