How to calculate your working capital requirement
Why a profitable business can run short of cash: the working capital formula, a worked example and the levers to reduce it.
"My business is profitable, but there's never any money in the account." If that sounds familiar, the answer very often lies in the working capital requirement.
What is the working capital requirement?
It represents the money tied up in your operating cycle. You buy goods, store them, sell them, then wait for your customer to pay. Throughout that time, you are advancing money. Your suppliers, for their part, give you payment terms that offset part of that advance.
The formula
- Inventory: goods, raw materials, finished or work-in-progress products;
- Trade receivables: invoices issued but not yet collected;
- Trade payables: invoices received but not yet paid.
For a fuller analysis, other operating receivables and payables are added (VAT, social liabilities), but the three items above explain most of it.
A worked example
A distribution company has annual revenue of MAD 3 million excluding VAT. At year-end:
| Item | Amount (MAD) |
|---|---|
| Inventory | 300,000 |
| Trade receivables | 450,000 |
| Trade payables | − 250,000 |
| Working capital requirement | 500,000 |
The company must permanently finance MAD 500,000 to keep its business running. Relative to revenue: 500,000 ÷ 3,000,000 × 360 = 60 days of revenue.
Why it grows with the business
If sales rise by 30%, inventory and receivables rise in the same proportion. The requirement climbs to around MAD 650,000: an extra MAD 150,000 must be found. That is why poorly anticipated rapid growth can put an otherwise profitable company in difficulty.
Expressing it in days
To manage it, track three periods:
- Customer payment period = Trade receivables ÷ Revenue incl. VAT × 360;
- Supplier payment period = Trade payables ÷ Purchases incl. VAT × 360;
- Inventory turnover = Average inventory ÷ Cost of goods sold × 360.
Every day gained on these periods frees up cash. In Morocco, Law No. 69-21 regulates payment terms between businesses: a useful basis for negotiations with your customers.
Five levers to reduce it
- Invoice faster: every day of delay in issuing an invoice is a day of cash lost.
- Follow up systematically: a simple reminder process (D+1, D+15, D+30) sharply reduces late payments.
- Ask for deposits on large orders or long projects.
- Adjust inventory: identify slow-moving items and cut excessive safety stock.
- Negotiate with suppliers: terms, staggered payments, smaller and more frequent deliveries.
How to finance it
The working capital requirement is a permanent need: it is ideally financed by stable resources (equity, self-financing capacity). Short-term solutions — overdrafts, discounting, factoring — can cover fluctuations, but they have a cost that must be factored into your profitability.
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