Accounting Working Capital (Annual) Calculator
Estimate the working capital your business needs from annual credit sales, cost of goods sold, cash conversion days and a cash buffer.
Overview
This annual working capital calculator estimates the funds needed to run normal trading activities. It uses annual credit sales, annual cost of goods sold, customer collection days, inventory days, supplier payment days, and an optional cash buffer.
How it works
The calculator estimates accounts receivable by multiplying daily credit sales by the customer payment period. It estimates inventory and accounts payable from daily cost of goods sold and the relevant day counts. Operating working capital is accounts receivable plus inventory minus accounts payable. Adding the cash buffer gives the estimated total working capital requirement. The cash conversion cycle shows the approximate time cash remains tied up between paying suppliers and collecting from customers.
How to use this calculator
- 1Enter annual sales made on credit.
- 2Add your annual cost of goods sold.
- 3Enter the average days customers take to pay.
- 4Enter your average inventory holding and supplier payment periods.
- 5Add a cash buffer, then review the estimated funding requirement.
Example Calculation
Annual credit sales
$1,000,000
Annual cost of goods sold
$600,000
Average customer payment period
45
Average inventory holding period
60
Average supplier payment period
30
Cash buffer
$50,000
Estimated working capital requirement
$222,603
With these inputs, estimated operating working capital is about 173,288 and the total working capital requirement including the 50,000 cash buffer is about 223,288. The cash conversion cycle is 75 days.
Frequently asked questions
What is working capital?
Working capital is the short-term funding available for daily operations. In this calculator, it is estimated from receivables, inventory, payables, and a chosen cash reserve.
How is the working capital requirement calculated?
The estimate is accounts receivable plus inventory minus accounts payable, then plus any cash buffer you enter.
What is a cash conversion cycle?
The cash conversion cycle estimates the days between paying suppliers and receiving cash from customers. It equals customer payment days plus inventory days minus supplier payment days.
Why are accounts payable deducted?
Supplier credit can temporarily fund part of your inventory purchases, so unpaid supplier balances reduce the amount of cash your business needs to provide itself.
Should annual sales include cash sales?
Use credit sales for the receivables calculation because cash sales are collected immediately. If only total sales are available, consider excluding the portion normally paid at the point of sale.
Does this include wages and overheads?
No. This simplified operating model focuses on receivables, inventory, and supplier credit. You can include an allowance for other short-term needs in the cash buffer.
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Assumptions and warnings
Assumptions
- The calculation uses a 365-day year.
- Credit sales are assumed to be collected evenly throughout the year.
- Cost of goods sold is assumed to be incurred evenly throughout the year.
- Inventory and supplier balances are estimated using average holding and payment periods.
- The result is an estimate and excludes items such as taxes, loans, fixed assets, and unusual seasonal swings.
Warnings
- This calculator provides an estimate only and is not financial or accounting advice.
- Actual funding needs can vary substantially with seasonality, payment terms, stock availability, taxes, and overdue invoices.