Resources · Professional guides
Working capital summary sheet
Core definitions
| Metric | Common formula |
|---|---|
| Current ratio | Current assets ÷ current liabilities |
| Quick ratio | (Current assets − inventory) ÷ current liabilities |
| Inventory days | (Inventory ÷ cost of sales) × 365 |
| Receivable days | (Trade receivables ÷ credit sales) × 365 |
| Payable days | (Trade payables ÷ credit purchases) × 365 |
| Cash conversion cycle | Inventory days + receivable days − payable days |
How professionals use these numbers
- Trend over 6–12 months matters more than one month’s ratio.
- Split by business line if product cycles differ.
- Link movements to operations: sales push, slow collections, stock build for seasonality.
- For lenders, explain why the cycle changed — not only that it changed.
Month-end working capital checklist
- Aged receivables reviewed; dispute items flagged.
- Aged payables reviewed; hold payments only with documented reason.
- Inventory aged; obsolete lines considered for write-down discussion.
- Undrawn facilities and covenant headroom noted where relevant.
Worked example: reading the cash conversion cycle
Take a trading company with revenue of Rs. 24,000,000, cost of sales of Rs. 18,000,000, average inventory of Rs. 2,220,000, average receivables of Rs. 2,630,000, and average payables of Rs. 1,480,000 (assume all sales and purchases are on credit).
| Metric | Calculation | Result |
|---|---|---|
| Inventory days | (2,220,000 ÷ 18,000,000) × 365 | 45 days |
| Receivable days | (2,630,000 ÷ 24,000,000) × 365 | 40 days |
| Payable days | (1,480,000 ÷ 18,000,000) × 365 | 30 days |
| Cash conversion cycle | 45 + 40 − 30 | 55 days |
That 55-day figure means the business funds roughly two months of operations out of its own working capital before cash comes back in. If last year's cycle was 40 days, the 15-day deterioration is the actual story to investigate — not the ratios in isolation. Was it a slower-paying customer segment, a deliberate stock build for a seasonal push, or suppliers tightening credit terms? The number tells you something changed; the explanation is what a lender or director actually wants to hear.
Where this sits in the ACCA syllabus
Working capital management is core to Management Accounting (MA) at the applied knowledge level and returns in depth at Financial Management (FM) and Advanced Financial Management (AFM), where you're expected to evaluate financing policies (aggressive vs. conservative), overtrading risk, and the trade-off between liquidity and profitability — not just compute the ratios.
Common mistakes I see in practice
- Using year-end balances instead of averages — a single date can be distorted by seasonality or a one-off collection push right before the reporting date.
- Ignoring the denominator mismatch — receivable days should use credit sales, not total revenue, if a meaningful cash-sales portion exists.
- Treating a negative cash conversion cycle as automatically good — it often is (think retail, paid before you pay suppliers), but for a manufacturer it can also signal payables being stretched past sustainable terms.
- Reporting the ratio without the trend — a single period's number rarely tells a lender or director anything actionable on its own.