What Is "Walk Me Through Working Capital" Testing?
Interviewers ask this question to separate candidates who understand business cash mechanics from candidates who only memorize line-item definitions. At analyst and associate levels, they want to hear that you can explain why revenue growth can still create cash strain, why inventory build can hide demand risk, and why supplier term changes can temporarily flatter cash flow.
In technical rounds, the question often starts simple and then gets layered. First you define working capital. Then you explain directionality: what happens when receivables grow faster than sales, or when payables stretch. Finally you handle judgment probes: what is structural versus temporary, what should be normalized for valuation, and how this affects underwriting in an M&A or LBO case.
A weak answer sounds mechanical: "Working capital is current assets minus current liabilities." A strong answer sounds like an investor: "Working capital is where operating friction or discipline appears in cash. If collections weaken and inventory turns slow, the business can report growth while liquidity quality deteriorates."
How to Calculate Working Capital in Interviews
Most interviewers expect an operating definition unless they specify otherwise. Keep your structure tight and explicit.
Operating Working Capital = (Accounts Receivable + Inventory + Other Operating Current Assets) - (Accounts Payable + Other Operating Current Liabilities)
Cash Impact in Forecasts = - Change in Operating Working Capital
The sign convention matters. If operating working capital increases, cash is consumed. If it decreases, cash is released. This is where many candidates make avoidable mistakes. They compute the number correctly but misstate the cash direction.
You should also be ready with days-based metrics because interviewers often switch from static balance-sheet discussion to operating cadence.
| Metric | Formula | Interpretation |
|---|---|---|
| DSO | Accounts Receivable / Revenue x 365 | How long customers take to pay |
| DIO | Inventory / COGS x 365 | How long inventory sits before sale |
| DPO | Accounts Payable / COGS x 365 | How long company takes to pay suppliers |
| Cash Conversion Cycle | DSO + DIO - DPO | Net days cash is tied in operations |
Mention that one-period spikes can be timing noise, especially around quarter-end inventory pulls or temporary receivables acceleration. Interviewers appreciate candidates who call out normalization rather than extrapolating one quarter blindly.
Worked Examples
Example 1: Revenue growth but weaker collections
Assume revenue grows 18 percent year over year, but accounts receivable grows 30 percent. DSO increases from 52 days to 63 days. On paper, the P&L looks healthy, yet cash conversion worsens. A strong interview answer explains that this can signal weaker customer quality, discounting pressure, or collection process breakdown.
In modeling terms, you would increase working-capital investment assumptions, lowering free cash flow in near years. In deal terms, that can compress debt capacity or reduce acceptable entry multiple. This direct bridge from operating metric to valuation is the core signal interviewers want.
Example 2: Inventory expansion before uncertain demand
Consider a hardware business building inventory ahead of product launch. DIO rises from 48 to 71 days while sell-through is not yet proven. Your answer should separate strategic inventory build from demand misread risk. If sell-through underperforms, excess inventory may require discounting or write-downs, creating a second-order hit to both margin and cash flow.
In interviews, this is where candidates can stand out by saying what they would test: channel inventory quality, return rights, and reorder visibility. You are showing that working capital is not just arithmetic; it is an operating risk map.
Example 3: Payables extension boosts short-term cash
Suppose management extends supplier terms from 45 to 65 days. DPO improvement releases near-term cash and can make free cash flow look strong. But interviewers expect you to mention sustainability. If suppliers tighten terms later, the cash benefit can reverse quickly.
A strong answer states that you would treat this as partly non-recurring unless supported by structural procurement leverage. In valuation and debt covenants, temporary payables gains should not be capitalized as permanent cash efficiency.
Common Mistakes and Better Alternatives
Mistake: giving only a textbook definition.
Better: define it, then explain one cash implication and one business driver.
Mistake: including cash and debt automatically without clarifying context.
Better: state you are using operating working capital unless interviewer requests total balance-sheet view.
Mistake: treating one-quarter movements as permanent trends.
Better: call out seasonality, timing effects, and normalized run-rate assumptions.
Frequently Asked Questions
How should I open a walk me through working capital answer?
Define operating working capital, explain cash directionality, then link to forecast and valuation impact.
What is the fastest formula I should memorize for interviews?
Change in net operating working capital equals change in operating current assets minus change in operating current liabilities.
Do I include cash and short-term debt in net working capital?
Usually no for operating analysis. Clarify definition first and follow interviewer context.
How does working capital affect free cash flow?
Higher working capital uses cash and lowers free cash flow; lower working capital releases cash and raises free cash flow.
What is a common mistake in working capital interview answers?
Explaining formulas without discussing operational drivers like collections, inventory turns, and payment terms.
How can I practice this question in one week?
Use multiple industries, compute days metrics, and rehearse a 90-second explanation that links operations to valuation.