"Walk me through how you'd calculate working capital, and tell me whether an increase is good or bad for cash flow" is a staple question in accounting and FP&A interviews — and it's one candidates trip over surprisingly often, mostly because they memorize the formula without practicing the actual calculation on numbers. Here's how to approach it methodically, using DSO, DIO, and DPO.

Step 1: Pull the Right Balance Sheet Line Items

You need five inputs, typically for two consecutive periods so you can measure the change: Revenue, COGS, Accounts Receivable, Inventory, and Accounts Payable. Revenue and COGS come from the Income Statement; the other three come from the Balance Sheet.

Step 2: Convert Each Balance Sheet Item Into a "Days" Metric

This is the step most candidates skip in practice, and it's exactly where interviewers probe. Each metric uses a specific balance sheet item over the income statement driver that actually generates it:

  • DSO = (Accounts Receivable / Revenue) × 365 — receivables are driven by revenue, since that's what generates the invoice
  • DIO = (Inventory / COGS) × 365 — inventory is carried at cost, so it's measured against COGS, not revenue
  • DPO = (Accounts Payable / COGS) × 365 — payables fund the purchase of goods, which shows up in COGS

A common interview trap: using Revenue as the denominator for all three. It's only correct for DSO — DIO and DPO should both use COGS.

Step 3: Combine Into the Cash Conversion Cycle

CCC = DSO + DIO − DPO. This single number tells you how many days of cash are tied up in the operating cycle between paying for inputs and collecting from customers. If CCC is lengthening period over period, more cash is getting stuck in the business.

Step 4: State the Source-or-Use Conclusion Explicitly

This is the part interviewers listen for most closely. Compute NWC = Accounts Receivable + Inventory − Accounts Payable for each period, then take the difference. An increase in NWC is a use of cash (more capital tied up in operations); a decrease is a source of cash (capital freed up). Say this explicitly — "NWC increased by $15m, which is a use of cash" — rather than just stating the dollar figure and leaving the interviewer to infer the direction.

Practice With Real Numbers

The best way to get comfortable with this sequence is to run it end-to-end on an actual two-year data set. The Working Capital Deep Dive case walks through exactly this: computing DSO, DIO, DPO, and CCC across two years, then determining whether the resulting change in NWC was a source or use of cash — the same structure you'll be expected to reproduce live in an interview.