Working Capital Review Template (DSO, DIO, DPO, Cash Conversion Cycle)

Working Capital Review: [Organisation name] [Period, e.g. FY2026]

Periodic review of trade working capital: receivable days (DSO), inventory days (DIO), payable days (DPO) and the cash conversion cycle, with receivables and credit policy, inventory health, payables and supplier finance programmes, benchmarking, the cash release opportunity, risks and an action plan. Written as original practice guidance for finance teams. Disclosure requirements for supplier finance arrangements are referenced by number only (IAS 7 and IFRS 7 as amended in May 2023, effective for annual periods beginning on or after 2024-01-01; FASB ASC 405-50 via ASU 2022-04). Obtain the standard or law for the normative text. Replace every [bracketed] value and every row marked Example. This is a document format, not financial, investment, tax, legal or accounting advice.

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Revision history

Contents

1. Summary and targets
2. Cash conversion cycle
3. Receivables and credit policy
4. Inventory
5. Payables and supplier finance programmes
6. Benchmarking
7. Cash release opportunities
8. Risks and constraints
9. Action plan and tracking
10. Glossary and references

1. Summary and targets

Example: At 2026-12-31 Corvid Commerce Group's cash conversion cycle was 37.0 days (DSO 30, DIO 50, DPO 43), an improvement from 41.0 days a year earlier. The FY2027 budget (assumption ASM-012) lets the cycle drift to 40 days (31, 52, 43) as volumes grow, and Q1 2027 purchase orders placed for budget volumes show that inventory is the main risk: commerce stock includes slow-moving lines bought for a promotion that underperformed. This review proposes stretch targets of 28, 44 and 45 days (cycle 27 days). At Q4 2027 budget volumes they would hold about EUR 2.7m (2,670k) less cash in trade working capital than the budget days. On budget days trade working capital rises by 2,328k in FY2027; on the target days it falls by 343k. The budget's total working capital outflow of 2,100k also includes deferred revenue, accrual, prepayment and tax timing items (reconciled in section 7.2). The four priority actions are clearing slow-moving stock, moving enterprise customers to direct debit, enforcing payment terms on overdue accounts, and aligning standard supplier terms with the group policy without extending supplier finance further.

Check: 1,467 + 812 + 391 = 2,670; 30 + 50 - 43 = 37, 31 + 52 - 43 = 40 and 28 + 44 - 45 = 27. The cash values are computed in section 7 from unrounded balances.

2. Cash conversion cycle

2.1 Conventions

2.2 Formulas

Some organisations use annual flows and 365 days, or purchases instead of cost of sales for DPO; state the choice and keep it. Because DIO uses a segment denominator, the cycle adds days measured on different flows; it is a management measure, not an exact count of days.

2.3 Inputs and results

Example: Corvid Commerce Group, Q4 2026 flows and 2026-12-31 balances, EUR thousand.

Value of one day at Q4 2027 budget volumes: revenue 44,000 / 90 = 489 per day of DSO; commerce cost of sales 9,140 / 90 = 102 per day of DIO; cost of sales 17,600 / 90 = 196 per day of DPO (Q4 2027 budget revenue 44,000 at the budget gross margin of 60%).

2.4 Segment view

Measured on total cost of sales the same stock would show 27.7 days (4,700 / 15,280 x 90), which understates the stock position because subscription and services cost of sales carry no inventory; the commerce view (50.0 days) is the one to manage, and it is the convention used throughout this review.

2.5 Interpreting the cycle

The cash conversion cycle measures how long each euro spent on goods and services stays tied up before customers pay it back. A shorter cycle means the business needs less funding to grow; a negative cycle, common in subscription and marketplace models where customers pay upfront, means growth generates cash. Interpret the figures with care:

• Mix effects. A change in the share of revenue from a segment with different terms moves group days without any change in behaviour. Compare segment metrics before concluding that performance changed.
• Growth effects. In a fast-growing business, closing balances reflect recent, higher activity while the denominator covers the whole year, so days look worse than the underlying behaviour. Use the last quarter's flow annualised, or average balances, as a cross-check.
• Seasonality. Year-end balances in a retailer can be unusually low (after peak trading) or high (before it). Use the average of 13 month-end balances when the pattern is strong.
• Accounting changes. Reclassifications (for example contract assets moved out of receivables, or supplier finance payables moved to borrowings) change the metric without changing cash. Restate prior periods when they occur.

The metric is a diagnostic, not the goal. The goal is the cash released and the risk avoided, measured in currency.

3. Receivables and credit policy

3.1 Ageing

Check: 9,000 + 1,900 + 750 + 280 + 370 = 12,300. Shares: 9,000 / 12,300 = 73.2%; 1,900 / 12,300 = 15.4%; 750 / 12,300 = 6.1%; 280 / 12,300 = 2.3%; 370 / 12,300 = 3.0%; total 100.0%.

The loss allowance for expected credit losses is measured under the group's accounting policy (for IFRS reporters, IFRS 9 simplified approach for trade receivables, referenced by name only). This review uses the net balance and does not re-measure the allowance.

3.2 Credit policy compliance

3.3 Receivables levers

• Move enterprise customers from invoice to direct debit or card on file at renewal.
• Invoice on the day the service starts or the milestone is accepted; remove unbilled delays.
• Fix dispute root causes (wrong purchase order numbers, missing proof of delivery) rather than chasing each case.
• Consider non-recourse receivables financing only after checking cost, accounting derecognition and covenant definitions; it changes funding, not the underlying collection performance.

3.4 Customer conversations

Changes to payment terms and methods work best when they are part of the commercial conversation rather than a finance demand. Give sales teams a simple rule set: the standard terms, who can approve exceptions and at what cost, and the incentive for customers who move to automatic payment. Track exceptions so that a temporary concession does not become the norm. For customers in difficulty, agree a written payment plan instead of informal tolerance, and reflect it in the expected credit loss review and in the 13-week forecast.

4. Inventory

4.1 Ageing

Check: 3,280 + 900 + 380 + 140 = 4,700. Shares: 69.8% + 19.1% + 8.1% + 3.0% = 100.0%.

4.2 Inventory health findings

Inventory measurement (lower of cost and net realisable value under IAS 2, referenced by name only) is an accounting policy matter; record write-downs in the period they arise and do not hold them back to protect margins.

4.3 Setting stock targets

Set inventory targets line by line from service level, demand variability and supplier lead time, then add them up; do not divide a group target across lines. For each line, decide the service level the business wants (for example the share of orders delivered from stock), estimate demand variability from recent sales, and size safety stock to cover variability over the replenishment lead time. Add cycle stock (the average half of each order quantity). The sum gives a target that the commercial team can defend.

Classify lines by contribution and velocity. Fast-moving, high-margin lines deserve generous service levels; slow, low-margin lines may be better made to order, sourced from a distributor or discontinued. Agree the treatment of end-of-life and promotional stock before the buy, including the clearance route and the price floor, so that excess is resolved quickly rather than held in the hope of a full-price sale.

5. Payables and supplier finance programmes

5.1 Terms and discipline

In the EU, Directive 2011/7/EU caps contractual payment periods between businesses at 60 days unless expressly agreed and not grossly unfair, with stricter limits where public authorities are the debtor (Articles 3 and 4). A 2023 Commission proposal for a regulation to replace the directive was reported in 2025 as facing withdrawal; check the current status. In the UK, qualifying large companies report payment practices under the Reporting on Payment Practices and Performance Regulations 2017, as amended (including retention reporting for construction contracts from financial years beginning on or after 2025-04-01); check the current thresholds. The UK government has also announced further late-payment measures, including consultation on a statutory maximum payment term; treat these as proposals until legislation is made, and check legislation.gov.uk for the amending instruments in force.

5.2 Supplier finance programme

Example: Corvid's commerce entity runs a bank-sponsored supplier finance programme. Suppliers may sell approved invoices to the bank for early payment; Corvid pays the bank on day 60 instead of the standard 45 days.

Programme invoices add 10.0 days to reported DPO (43.0 - 33.0). The programme is a source of liquidity risk: if the bank withdrew it, suppliers would ask for shorter terms and up to 1,700 would fall due sooner. Show that risk in Liquidity and Funding Plan (finance/liquidity-funding-plan) and check whether the facility agreement or rating methodology treats programme balances as debt. Do not extend the programme to raise DPO further until the treasurer and the auditor have reviewed classification.

5.3 Supplier finance governance

Run any supplier finance programme under explicit governance. The treasury policy should state the maximum programme size, the approved banks, the standard extended terms and who may admit suppliers. Review the following at least annually with the financial controller and the auditor:

• whether the payables under the programme keep their nature as trade payables or have become borrowings in substance, considering the terms, the extension beyond normal terms in the industry and any security or guarantees given to the bank;
• the disclosures required by the applicable framework, including the carrying amounts, the amounts already paid by the bank to suppliers and the range of payment due dates;
• how lenders and rating analysts treat programme balances in their own leverage measures;
• the concentration risk if a single bank provides the programme.

Communicate honestly with suppliers: the programme should give them a real option of early payment at a fair discount, not be a way to impose longer terms on suppliers who cannot afford them.

6. Benchmarking

6.1 Trend

Check: 32.0 + 54.0 - 40.0 = 46.0; 31.0 + 52.0 - 42.0 = 41.0; 30.0 + 50.0 - 43.0 = 37.0. All years use the quarter convention of section 2.1.

6.2 Peer comparison

Do not use any figure in this table without a named source and date. If no reliable peer data exists, set targets from your own best quarter and from policy terms instead.

7. Cash release opportunities

The baseline is trade working capital at 2027-12-31 on the FY2027 budget days (ASM-012) and Q4 2027 budget flows; the target uses the review target days on the same flows. For each component:

(for payables, the release is the target balance minus the baseline balance, because higher payables hold cash in).

Check: baseline 15,156 + 5,281 - 8,409 = 12,028; target 13,689 + 4,468 - 8,800 = 9,357. Every figure is computed from unrounded balances and then rounded (for example receivables 31 / 90 x 44,000 = 15,155.6); the unrounded release is 1,466.7 + 812.4 + 391.1 = 2,670.2, shown as 2,670. Subtracting the rounded totals gives 2,671; the difference is rounding only. In summaries, round to about EUR 2.7m and show the exact figure in brackets, as section 1 does.

7.1 Value of the release

The cash released by working capital improvement is a one-off reduction in funding need, plus a recurring saving in financing cost. A simple estimate of the annual value multiplies the release by the cost of funding:

Example: at the term loan's all-in 4.0% cost of debt, a release of 2,670 saves about 2,670 x 4.0% = 107 per year in interest. Compare that saving, and the reduction in liquidity risk, with the cost of each action: clearance discounts, early payment discounts given to customers, price increases asked by suppliers for longer terms. An action whose annual cost exceeds its financing saving and risk benefit should not be taken, however attractive the days look.

Check: 500 + 300 + 800 + 700 + 400 = 2,700, consistent with the 2,670 gap (inventory 800 against 812, receivables 1,500 against 1,467, payables 400 against 391).

7.2 Reconciliation to the budget cash flow

The release above compares two FY2027 balances (at budget days and at target days). The budget cash flow instead shows the movement from the actual balance at 2026-12-31 to the budgeted balance at 2027-12-31, and it covers every working capital item, not only trade receivables, inventory and trade payables. Reconcile the two before either figure goes to the board, because a reader who sees a "release of 2.7m" in this review and an "outflow of 2.1m" in the budget will assume one of them is wrong.

Check: -2,328 + 3,580 - 1,400 - 600 - 1,352 = -2,100. On the review target days the trade balance at 2027-12-31 is 9,357, a release of 343 against 2026-12-31 (9,700 - 9,357) instead of the budget outflow of 2,328; the difference of 2,671 (2,670 before rounding) is the opportunity in section 7. If every action delivers, the FY2027 working capital line would move from an outflow of 2,100 to an inflow of about 570 (-2,100 + 2,670). Keep the budget unchanged and feed releases into the forecasts only once actions are under way. The non-trade items are Example figures; take them from the budget model and agree the reconciliation with the budget owner.

Payables opportunity OPP-005 applies only to suppliers on terms shorter than the group standard. Do not apply it to small suppliers who depend on prompt payment; set an exemption list.

8. Risks and constraints

9. Action plan and tracking

9.1 Monthly tracking

Report the tracking table in Monthly Management Report (finance/monthly-management-report) and feed the expected releases into 13-Week Cash Flow Forecast (finance/13-week-cash-flow-forecast) only once actions are under way.

10. Glossary and references

10.1 Glossary

10.2 References

Standard and licence note

Structure aligned with common corporate finance practice for working capital reviews; no standard prescribes the format. IAS 2, IAS 7, IFRS 7, IFRS 9 and FASB ASC 405-50 are cited by name and paragraph or topic number only; no text from them is reproduced. Based on Directive 2011/7/EU and the UK Reporting on Payment Practices and Performance Regulations 2017 as public law, described in original words. Corvid Commerce Group and every figure are fictional; peer data is left as a placeholder. This template is original text written for this collection. Check the current official versions of cited standards and laws before use. Template licence: MIT.