Working Capital Requirement Calculator: Sizing the Cash Gap

You need to enable JavaScript to run this app.Working Capital Requirement Calculator: Sizing the Cash GapYour revenue, your margin and your collection cycle give the amount of working capital your business has to keep in the operation permanently, what one more dollar of revenue adds to it, and the growth rate above which profit stops keeping up. Your numbers, no offer attached.Free to use, with no sign-up and no email address. The figures you enter stay in your browser — they are not sent anywhere and they are not stored.The methodology, in fullThe formulas

Cash conversion cycle = days inventory outstanding + days sales outstanding − days payables outstanding

Annual revenue = monthly revenue × 12

Working-capital intensity = (1 − net margin) × cycle days ÷ 365

Working capital requirement = annual revenue × (1 − net margin) × cycle days ÷ 365

Average daily operating outflow = annual revenue × (1 − net margin) ÷ 365

The same requirement, stated the other way = daily operating outflow × cycle days

Additional requirement in a growth year = growth rate × the requirement

Retained profit available = share of profit retained × net margin × annual revenue

Sustainable growth rate = (share retained × net margin × 365) ÷ ((1 − net margin) × cycle days)

Why the two forms of the requirement are one formulaThat is also why the margin is a required input rather than a nicety. Leave it out and the formula becomes revenue × cycle ÷ 365, which on the worked year gives $480,000 against the published $451,200 — 6.4% high, and a disagreement with the article on the single number it is built around.Definitions

Cash conversion cycle (CCC) — Days inventory outstanding plus days sales outstanding minus days payables outstanding: the distance in days from cash out to cash in, net of the credit suppliers extend.

Working-capital intensity — The cents of working capital each dollar of annual revenue keeps tied up in the cycle: (1 − net margin) × cash conversion cycle in days ÷ 365. A 6% business with a 73-day cycle has an intensity of 0.188; growth of any amount consumes that share of the new revenue before the new revenue pays.

Sustainable growth rate — The fastest a business can grow its revenue from retained profit alone, without new outside capital or a change in how it is financed. For a small firm whose capital is its working capital: (share of profit retained × net margin × 365) ÷ ((1 − net margin) × cash conversion cycle in days). Named by Higgins in 1977 for the corporate case.

Retention ratio — The share of net profit left in the business rather than drawn by the owner during the year. One factor in the numerator of the sustainable growth rate; an owner who draws half the profit has halved the capital available to grow.

Timing gap — A shortfall in which the revenue exists and arrives later than the expense — a contract that pays in sixty days, a seasonal ramp, retainage held. What working capital funding is for.

The worked yearA commercial HVAC service contractor billing $200,000 a month at a 6% net margin, on net-30 terms that pay in 58 days, with 30 days of parts on the shelf and suppliers paid in 15 — a 73-day cycle. The owner draws half the profit and the company is about to grow 40%.

Annual revenue — $2,400,000

Cash conversion cycle (30 + 58 − 15) — 73 days

Working-capital intensity — 0.188

Daily operating outflow — $6,180.82

Working capital required, permanently — $451,200

Retained profit available — $72,000

New revenue that profit can fund on its own — $382,979

Sustainable growth rate — 16.0%

Requirement after 40% growth — $631,680

Extra working capital the growth adds — $180,480

The gap — $108,480

What to do with the numberPull the levers that cost nothing first, because each one raises the rate permanently. Ten days off collection takes the worked year from 16.0% to 18.5%. Paying suppliers at 30 days instead of 15 takes it to 20.1%; price the early-payment discount before you give it up. Two points of margin take it to 21.7%, and drawing 25% of profit instead of 50% takes it to 23.9%. All four together reach 49.6%, which is more than the growth the example is attempting — a 40% year can be self-funded at these margins, but only by a business that runs every part of its cycle deliberately.