Build a Working Capital Model
This guide explains how to model working capital in Model Reef using the timing and accrual engine. Working capital arises from differences between when income and expenses are recognised and when cash actually moves, primarily through receivables and payables.
Before you start
You should have:
Revenue and COGS variables defined.
Opex and Staff variables for core operating costs.
At least a basic Capex and Depreciation structure if you want a full three statement model.
If you are early in your build, review:
Build a Cost of Goods Model
Build a Staffing Cost Model
What you will build
Receivables timing using delays on Revenue.
Payables timing using delays on COGS, Opex and Staff.
Optional other working capital items such as prepayments at a high level.
A clear view of Change in Net Working Capital in the Cash Waterfall.
Decide customer payment terms
For each major revenue stream, determine typical payment terms, for example:
Immediate payment (point of sale).
14 to 30 day terms.
60 days for enterprise customers.
In each Revenue variable:
Set accrual timing to match when revenue is earned.
Set a delay that approximates customer payment terms.
This will create:
Accounts Receivable on the Balance Sheet when revenue is recognised but unpaid.
Cash receipts later in the Cashflow Statement and Cash Waterfall.
Decide supplier payment terms
For each major supplier or cost category, determine payment terms, for example:
End of month.
30 days after invoice.
45 or 60 days for large suppliers.
In the relevant COGS, Opex and Staff variables:
Set accrual timing according to when goods or services are consumed.
Set payment delays according to supplier and payroll terms.
This will:
Create Accounts Payable for unpaid expenses.
Shift cash outflows forward or backward relative to accruals.
Represent other working capital items if needed
If you have important other working capital components, for example:
Prepaid expenses.
Deposits.
Deferred revenue.
You can model them using a mix of Asset, Liability, Revenue and Opex variables, for example:
Upfront cash received for services to be delivered later might be represented as:
Revenue recognised over time.
A Liability representing deferred revenue that reduces as service is delivered.
At a high level, the key is to capture timing differences between cash and accrual recognition.
Inspect AR, AP and other balances
Open the Balance Sheet and check:
Accounts Receivable balance evolution.
Accounts Payable balance evolution.
Any other working capital Assets or Liabilities you created.
Balances should:
Grow when terms are extended or revenue and cost increase rapidly.
Shrink when terms are shortened or volumes fall.
If balances grow without reason, revisit timing settings.
Review Change in Net Working Capital in the Cash Waterfall
In the Cash Waterfall:
Identify Change in Net Working Capital.
This line reflects movements in:
Accounts Receivable.
Accounts Payable.
Other working capital balances.
Interpretation:
Positive Change in Net Working Capital usually represents a use of cash (working capital building).
Negative values represent a release of cash (working capital shrinking).
Check that changes align with business context, for example rapid growth often consumes working capital.
Test working capital scenarios
To explore working capital strategies, create variant models, for example:
Model - Working Capital - Current Terms.Model - Working Capital - Improved Collections.Model - Working Capital - Extended Supplier Terms.
In each model:
Adjust delays on Revenue and cost variables to represent better or worse terms.
Review effects on:
Cash balances.
Change in Net Working Capital.
Debt requirements and valuation.
This allows you to test the impact of credit control, payment negotiation and operational changes.
Troubleshooting
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