Working Capital Management Simulation
Diagnose your company's short-term liquidity and operational efficiency, and explore improvement strategies.
Financial Data Input
Enter your company's annual data to automatically calculate working capital metrics.
Income Statement Items
Balance Sheet Items (Average)
Working Capital Analysis
Current Ratio
3.10
Quick Ratio
1.70
Net Working Capital
1,050,000
Cash Conversion Cycle (CCC)
Total Cycle
65 Days
CCC = DIO + DSO - DPO. A shorter cycle indicates better cash liquidity.
Core Concepts
Working Capital
The capital of a business which is used in its day-to-day trading operations, calculated as an indicator of short-term financial health and operational efficiency. It generally refers to Net Working Capital.
Net Working Capital = Current Assets - Current Liabilities
Working Capital Policies
Policies that determine the level of working capital, directly impacting a company's profitability and risk.
- Conservative Policy: Maintains a high level of current assets, lowering liquidity risk but potentially reducing profitability.
- Aggressive Policy: Maintains a low level of current assets, increasing profitability but also increasing the risk of a liquidity shortage.
Key Metrics Analysis
Liquidity Ratios
Metrics that measure a company's ability to meet its short-term debt obligations.
- Current Ratio: Current Assets / Current Liabilities. A ratio of 2 or higher is generally considered good.
- Quick Ratio: (Current Assets - Inventory) / Current Liabilities. A more conservative measure that excludes less-liquid inventory; a ratio of 1 or higher is generally considered good.
Cash Conversion Cycle (CCC)
The average time it takes for a company to convert its investments in inventory and other resources into cash from sales. A shorter cycle indicates higher operational efficiency and better cash liquidity.
CCC = DIO + DSO - DPO
- Days Inventory Outstanding (DIO): (Average Inventory / COGS) × 365. The time it takes to turn inventory into cash.
- Days Sales Outstanding (DSO): (Average Accounts Receivable / Annual Sales) × 365. The time it takes to collect payment after a sale.
- Days Payables Outstanding (DPO): (Average Accounts Payable / COGS) × 365. The time it takes to pay its suppliers.
Working Capital Management Strategies
Strategies to shorten the cash conversion cycle and improve working capital efficiency.
Cash Management
The key is to accelerate cash inflows and delay cash outflows.
- Accelerate Collections: Lockbox systems, concentration banking, etc.
- Delay Disbursements: Payment scheduling, using electronic funds transfer (EFT), etc.
Inventory Management
Reduce excess inventory to cut holding costs and capital costs.
- Economic Order Quantity (EOQ): Determine the order quantity that minimizes total inventory costs.
- Just-in-Time (JIT): Minimize inventory levels by holding stock only when needed.
- Kanban: Visually manage the workflow of the production process.
Receivables Management
Optimize credit policies and shorten collection periods.
- Establish Credit Policy: Define credit period, credit standards, discount policy, etc.
- Assess Creditworthiness: Evaluate customer credit to manage bad debt risk.
- Active Collection Efforts: Strengthen procedures for managing overdue accounts.