How do you forecast working capital?
A core FP&A interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Build from drivers: DSO × daily revenue = AR. DIO × daily COGS = inventory. DPO × daily purchases = AP. NWC = AR + inventory – AP. Change in NWC = cash flow impact. Never just use NWC as a fixed % of revenue.
WHAT INTERVIEWERS LISTEN FOR
- ✓DSO drives AR
- ✓DIO drives inventory
- ✓DPO drives AP
- ✓NWC = AR + inventory - AP
- ✓Change in NWC is cash flow
COMMON MISTAKES
- ✗Using fixed % of revenue
- ✗Ignoring days drivers
- ✗Mixing up DPO and DSO
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