All companies require cash to run their daily operations. Cash management, therefore, is one of the most 
important components that a company needs to regulate in order to meet its daily cash requirements. The 
cash required for these daily activities is called the ​working capital​. In this session, you will learn how to 
measure the working capital of a company. 
 

 
 
Operating activities refer to the activities that are related to the core of a company’s business. They are 
different for a manufacturing company and a services company because the latter does not offer tangible 
products. 
 
 
The operating cycle of a company includes five basic operating activities, which are as follows: 
 

 
 
 
 
 
 
 
 
 
 
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There are some factors which may affect the operating cycle. Some of these factors are:  
 

 
 

 
 
The cash conversion cycle (CCC) represents the total number of days it takes for a firm to convert its 
investment in inventory into cash. 
 
The CCC can be calculated as follows: 

 
 
The three metrics that affect the CCC are explained below. 

 
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The formulas for calculating the three metrics are as follows: 
 
1. Days Inventory Outstanding (DIO): 

 
2. Days Sales Outstanding (DSO): 

 
3. Days Payable Outstanding (DPO): 

 
A negative cash conversion cycle (CCC) indicates that a company pays its suppliers after it sells the goods and 
receives the payment for them. 
 

 
 
Working capital is the capital that is required by a company to pay for its short-term operating activities. It is a 
measure of the liquidity, efficiency and overall short-term financial health of a company. 
 
The formula for calculating the working capital is as follows: 

 
 
The values of the current assets and current liabilities of a company directly affect its working capital. This is 
explained below. 
 

 
 
 
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The working capital is of following two types: 
 

 
 
 
The net working capital is commonly referred to as the working capital. A company’s objective is to optimise 
its working capital requirements. 
 
 

 
 
 
 
 
 
 
 
 
 
 

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The formulas for calculating the working capital and the projected working capital with the three metrics DIO, 
DPO and DSO and that for calculating the additional cash are as follows: 
 
1. Working capital: 

 
where, 
● Average receivables = DSO * Average sales 
● Average inventory = DIO * Average COGS  
● Average payables = DPO * Average COGS  
 
2. Projected working capital: 

 
where, 
● Projected receivables = DSO * Projected sales  
● Projected inventory = DIO * Projected COGS  
● Projected payables = DPO * Projected COGS  
 
3. Additional cash: 

 
 
 

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