Working Capital Formula
NOWC = Inventory + Receivables - Payables DIO = Inventory / Cost of goods sold x 365 DSO = Receivables / Revenue x 365 DPO = Payables / Purchases x 365 Cash conversion cycle (CCC) = DIO + DSO - DPO
Finance & Business Plan
NOWC = Inventory + Receivables - Payables DIO = Inventory / Cost of goods sold x 365 DSO = Receivables / Revenue x 365 DPO = Payables / Purchases x 365 Cash conversion cycle (CCC) = DIO + DSO - DPO
Net operating working capital (NOWC) is the cash tied up in day-to-day operations: inventory plus trade receivables minus trade payables. It represents money you have committed to stock and to customers who have not yet paid, offset by the credit your suppliers extend to you. A low or negative NOWC means the business largely finances its own operations; a high NOWC means cash is locked in the cycle and unavailable for other uses.
The cash conversion cycle (CCC) is the number of days between paying for inventory and collecting cash from sales. It equals days inventory outstanding (DIO) plus days sales outstanding (DSO) minus days payable outstanding (DPO). A short or negative CCC is excellent: it means you collect from customers before you have to pay suppliers, so the business funds itself. Many cash-based restaurants achieve exactly this.
DIO = inventory / cost of goods sold x 365, the days stock sits before being sold. DSO = receivables / revenue x 365, the days customers take to pay. DPO = payables / purchases x 365, the days you take to pay suppliers. Each translates a balance-sheet figure into a duration, which makes the working-capital position intuitive and comparable over time.
Restaurants typically collect cash immediately (low receivables) but pay suppliers on 30-60 day terms (high payables), while holding only modest inventory. That combination can make payables larger than inventory plus receivables, giving negative working capital and a negative cash conversion cycle. It is a genuine advantage: customers effectively pre-fund the operation, freeing cash for growth or to cushion the low season.
If working capital is positive, growing sales ties up proportionally more cash in inventory and receivables, so fast growth can create a cash squeeze even when profitable, the so-called overtrading risk. If working capital is negative, growth can actually release cash. The calculator shows the additional working capital a given level of growth will require so you can plan financing before scaling up.