How much cash you have tied up

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Receivables, inventory and suppliers become tied-up capital. Here you see how much, and how much you free up by recovering ten days.

Revenue for the year (€) Cost of goods sold for the year (€) Days to collect from customers Days of inventory Days to pay suppliers VAT on receivables and payables (%)

How it is calculated

We work on a commercial year: 360 days, 30-day months.

Receivables = revenue divided by 360, times the collection days.
Inventory = cost of goods sold divided by 360, times the days in stock.
Suppliers = purchases divided by 360, times the payment days.

VAT is added to receivables and suppliers, because what goes through the bank account is the amount including tax, not the taxable amount.

The total — receivables plus inventory minus suppliers — is the capital the company keeps tied up in order to operate. It is why you can close the year in profit and still have no money: the profit is in there, in invoices still to be collected and on the shelves.

How to really use it

Before deciding anything, look at why working capital has grown. The items move for two different reasons:

volume effect: the flows have changed while the days stayed the same. That is growth, and it is natural;
days effect: the days have changed while volumes stayed the same.

The difference is not academic. If receivables have risen only because you sold more, chasing customers is the wrong move: you chase payments when the days have grown, not the volumes.

Inventory is your bank, but without an IBAN: it is tied-up capital, it does not pay wages and earns no interest; it absorbs it. The question to ask is not «what is missing», but how much cash you could free up without selling a single extra unit.

This is a calculation on three numbers. On your company's real figures, month by month and with a forecast of the next twelve months, the Firm's Predictive Analysis Simulator does it: find out how it works on www.fmstudioconsulenza.it.