What Is a Working Capital Forecast?
Key Takeaways
- Working capital is the difference between current assets and current liabilities.
- A working capital forecast projects how this balance will change over time.
- Growth consumes working capital — fast-growing businesses can run short of cash even when profitable.
- Days Sales Outstanding and Days Payable Outstanding are the key levers to manage.
Understanding working capital
Working capital is the difference between a business's current assets (cash, trade debtors, and inventory) and its current liabilities (trade creditors, accruals, and short-term debt). Positive working capital means you have more liquid assets than short-term obligations — a healthy position. Negative working capital means your short-term liabilities exceed your liquid assets, which can signal a cash crisis even if the business is profitable. For SMEs, working capital is often the critical constraint on growth: you can be winning new business while running out of cash to fund it.
Why working capital increases with growth
One of the most counterintuitive aspects of running an SME is that growing faster can make your cash position worse, not better. When revenue grows, your trade debtors balance grows (more invoices outstanding), your inventory balance grows (more stock needed), but your trade creditors balance grows more slowly if you pay suppliers quickly. The net result is that growth ties up cash. A working capital forecast makes this dynamic visible, projecting the cash impact of growth so you can arrange financing — an overdraft, invoice finance, or a working capital loan — before the cash gap opens.
Key metrics to include in the forecast
The three metrics that drive working capital are Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and Days Payable Outstanding (DPO). DSO measures how many days on average it takes customers to pay you. DIO measures how many days stock sits before being sold. DPO measures how many days you take to pay suppliers. Your cash conversion cycle — DSO plus DIO minus DPO — tells you how many days of revenue you need to fund at any given time. Improving any one of these metrics directly reduces the working capital you need, releasing cash.
Building the working capital forecast
A working capital forecast projects the expected debtor, creditor, and inventory balances each month, derived from your revenue and cost forecasts. Debtors are calculated as (monthly revenue × DSO / 30). Creditors are calculated as (monthly purchases × DPO / 30). Inventory is calculated from your stock turn assumption. Each month's closing balance feeds into the next month's opening balance. The change in working capital each month — the movement, not the absolute level — feeds directly into your cash flow forecast as a cash inflow (if working capital decreases) or outflow (if it increases). This linkage between the working capital forecast and the cash flow forecast is where the real planning value lies.