Private Equity Working Capital Velocity Test

PRIVATE EQUITY WORKING CAPITAL VELOCITY TEST — ILLUSTRATIVE DEFAULT RECORD

INPUTS
Prior 30-day revenue: $6,000,000
Current 30-day revenue: $7,000,000
Prior 30-day COGS: $3,600,000
Current 30-day COGS: $4,200,000
Prior DSO: 45 days
Current DSO: 52 days
Prior DIO: 50 days
Current DIO: 58 days
Prior DPO: 40 days
Current DPO: 55 days
Next-period revenue growth: 8%
Next-period COGS growth: 8%

COMPUTED POSITION
Prior cash-conversion cycle: 55.0 days
Current cash-conversion cycle: 55.0 days
Net working-capital cash change: −$2,353,333
Activity / growth effect: −$1,746,667
Velocity / terms effect: −$606,667
Receivables velocity effect: −$1,516,667
Inventory velocity effect: −$1,040,000
Supplier-terms effect: $1,950,000
AR + inventory velocity effect: −$2,556,667
Supplier-term support: $1,950,000
Next-period cash requirement if current days persist: −$1,004,267

FINDING
The headline cash-conversion cycle is unchanged at 55.0 days, but the underlying components are not stable. Slower receivables and inventory conversion consume $2,556,667, while longer supplier terms release $1,950,000, leaving a net velocity drag of $606,667. Activity growth adds another $1,746,667 of cash absorption. If the current days persist into the entered next-period growth, working capital requires another $1,004,267 of cash.

METHOD STATUS
Management-entered operating assumptions. AR equals 30-day revenue divided by 30 multiplied by DSO. Inventory and AP use the same daily-balance relationship with 30-day COGS and DIO/DPO. Period-over-period balance change is decomposed exactly using a symmetric two-factor decomposition: activity effect equals the change in daily activity multiplied by average days, and velocity/terms effect equals the change in days multiplied by average daily activity. AR and inventory increases consume cash; AP increases release cash. Forward cash requirement applies the entered next-period revenue and COGS growth to current DSO, DIO, and DPO. No external benchmark is used.