The working capital calculation determines funds available for operations and growth by subtracting a business’s liabilities from its assets. Improving working capital offers multiple benefits, such as unlocking tied-up capital, reducing cost of debt, meeting capital market prerequisites, and boosting business performance.

One effective method for improving working capital involves shortening the cash-to-cash cycle time, also known as the cash-conversion cycle. This metric comprises three key performance indicators: days sales outstanding (DSO), days inventory outstanding (DIO), and days payable outstanding (DPO). Calculating the cash-to-cash cycle involves adding DSO and DIO, then subtracting DPO.

These three critical KPIs offer procurement and finance professionals a rapid means to identify potential inefficiencies within inventory management, the supply chain, or collections processes. Such insights enable the implementation of strategic improvements aimed at generating additional working capital. Moreover, these KPIs enable the comparison of working capital performance within a company over time or against industry peers.