Three statements Updated November 2026

Working capital days

Working capital days express balance sheet items as days of activity: DSO = accounts receivable / revenue x 365, DIO = inventory / COGS x 365, DPO = accounts payable / COGS x 365. To forecast, reverse them: receivables = revenue x DSO / 365. Cash conversion cycle = DSO + DIO - DPO.

Syntax

DSO = AR / Revenue x 365;  DIO = Inventory / COGS x 365;  DPO = AP / COGS x 365

Part	What it is
`AR, Inventory, AP`	Period-end (or average) balances
`Revenue, COGS`	Annual flows; use 90 for a quarter or 30 for a month instead of 365

Examples

AR 120, revenue 1,460
=120 / 1460 * 365

Result: 30 days

Inventory 90 and AP 60, COGS 730
=90/730*365  and  =60/730*365

Result: 45 days and 30 days

Cash conversion cycle = 30 + 45 - 30 = 45 days.

Forecast receivables: revenue 1,825 at 30 days
=1825 * 30 / 365

Result: 150

Common mistakes

Using revenue for inventory and payables days: they relate to purchases, so use COGS.
Mixing a 365-day year with quarterly flows; match the day count to the period of the flow.
Letting forecast days drift from history without a reason; hold them flat or move them toward a stated target.

Practice Working capital days

These drills check your answer on live data, free, no account needed.

Working capital from daysForecast the working capital balances from the day counts in B2:B4: receivables from revenue, inventory and payables from cost of goods sold, each as days out of 365. Then net working capital is receivables plus inventory less payables.
Cash flow from operationsNet working capital balances are given for each year end, including 2025. Fill the change in working capital (row 8) and cash flow from operations (row 9): net income plus depreciation less the increase in working capital.

Questions

What does a high DSO mean?

Customers take longer to pay, so more cash is tied up in receivables. Rising DSO with flat revenue is an early warning of collection problems.

Should I use average or ending balances for days?

Average balances are more accurate for ratio analysis; ending balances are easier to reverse into a forecast. Be consistent across years.

Change in net working capitalChange in NWC = NWC this year - NWC last year. An increase uses cash and is subtracted in free cash flow; a decrease releases cash. Formula, examples, signs.
Cash flow from operationsCFO = net income + D&A + other non-cash charges - increase in working capital. How the indirect method works line by line, a worked example and sign errors.
Three-statement modelHow a three-statement model links net income, depreciation, capex, working capital, debt and cash so the balance sheet balances. Build order, links, check.
RevolverA revolver draws when cash falls below the minimum and repays from excess cash. The MIN and MAX formula, a two-year worked example and avoiding circularity.