Working capital, collections, and payments
Clear definitions and practical examples to help you understand the numbers and decisions.
Working capital
Working capital is current assets minus current liabilities at a stated date. Current assets may include cash, receivables, inventory, and other amounts expected to be realised or used in the short term; current liabilities are obligations due in the short term.
Read the explanationNet operating working capital
Net operating working capital (NOWC) is the net amount tied up in the day-to-day operating cycle. A common management calculation is operating current assets—such as receivables, inventory, and prepaid operating costs—minus operating current liabilities—such as trade payables and accrued operating expenses. It normally excludes cash, debt, and other financing balances because those finance the operation rather than form part of its operating cycle.
Read the explanationWorking capital requirement
Working capital requirement is the amount of funding the operating cycle needs because cash is tied up in inventory, customer credit, and other operating current assets before supplier credit and operating accruals offset part of that need. It is often estimated using net operating working capital, but the term is forward-looking when management asks how much additional funding a plan will require.
Read the explanationNegative working capital
Negative working capital occurs when current liabilities exceed current assets. In an operating analysis, negative net operating working capital means supplier credit, customer advances, and operating accruals exceed receivables, inventory, and other operating current assets. It can release cash as the business grows, but it is not automatically evidence of financial strength.
Read the explanationAccounts receivable
Accounts receivable are amounts customers owe for goods or services already supplied on credit. They are a claim on future cash, not cash in the bank; the recorded amount may need an allowance when evidence suggests collection is doubtful.
Read the explanationAccounts payable
Accounts payable are amounts a business owes suppliers for goods or services already received on credit. They represent a future cash outflow, even when the invoice has not yet been paid; they are not free financing that can be ignored until a supplier complains.
Read the explanationReceivables ageing
Receivables ageing groups customer balances by how long they have been outstanding or overdue, for example current, 1–30 days late, and more than 30 days late. It turns one total receivables number into a collection-risk and timing view.
Read the explanationPayables ageing
Payables ageing groups supplier balances by due date or lateness. It shows which obligations are current, due soon, or overdue, so a business can manage cash without losing sight of supplier commitments.
Read the explanationOverdue receivables
Overdue receivables are customer amounts unpaid after the agreed due date. They are more than a bookkeeping label: each overdue invoice requires evidence about whether the delay is administrative, disputed, financially distressed, or likely to continue.
Read the explanationPayment terms
Payment terms are the agreed rules for when and how a buyer pays a seller, including due date, deposits, instalments, discounts, late-payment consequences, and any conditions that must be met before payment. They affect cash timing, credit risk, pricing, and the relationship—not merely the text printed on an invoice.
Read the explanationTrade credit
Trade credit is credit a supplier gives a business by delivering goods or services now and allowing payment later. It supports the operating cycle, but it is a contractual obligation with a due date, not a substitute for a funding plan.
Read the explanationCustomer credit limit
A customer credit limit is the maximum unpaid exposure a seller permits for one customer under its credit policy. It controls how much delivery or service can occur before payment, using the customer’s creditworthiness, payment history, concentration risk, and the seller’s ability to absorb a loss.
Read the explanationCustomer deposits
Customer deposits are cash received before the company has delivered the promised goods or services. They improve cash timing, but they also create an obligation to perform, deliver, or refund under the contract; receiving a deposit is not the same as earning revenue.
Read the explanationSupplier advances
Supplier advances are cash paid to a supplier before the company receives the related goods or services. They can secure capacity, materials, or a better price, but they convert cash into a claim whose recovery depends on supplier performance and contract terms.
Read the explanationDays sales outstanding
Days sales outstanding (DSO) estimates the average days a company takes to collect credit sales: average trade receivables ÷ credit sales × days in the period. Use credit sales where available; total sales are only a labelled proxy.
Read the explanationDays payable outstanding
Days payable outstanding (DPO) estimates the average time taken to pay suppliers: average trade payables ÷ credit purchases × days in the period. Cost of sales is only a labelled approximation when credit purchases are unavailable.
Read the explanationDays inventory outstanding
Days inventory outstanding (DIO) estimates the average days inventory is held before sale or use: average inventory ÷ cost of sales × days in the period, using consistent cost and inventory definitions.
Read the explanationInventory turnover
Inventory turnover measures how many times average inventory is sold or used during a period: cost of sales ÷ average inventory. It is the reciprocal time view of inventory days when the same basis is used.
Read the explanationOperating cycle
The operating cycle is the time from acquiring inventory or inputs to collecting cash from the related sale. It commonly combines inventory days and receivables days; the cash conversion cycle also subtracts supplier payment days.
Read the explanationOvertrading
Overtrading occurs when a business expands sales or activity faster than its working capital and funding can support. Growth can increase cash strain because inventory, receivables, staffing, and delivery costs often rise before customer cash arrives.
Read the explanation