Lesson 4 of 8
Working capital on days
Costco held 27.6 days of inventory and took 30.1 days to pay for it in fiscal 2025. Its suppliers funded the shelves, and the cash cycle was 1.8 days.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Forecast each working capital balance as a number of days of the flow that drives it, so the balance scales with the business instead of being typed in.
- At 31 August 2025 Costco held 27.6 days of inventory, collected in 4.3 days and paid in 30.1 days, for a cash conversion cycle of 1.8 days.
- The balance sheet also carried 2,854 million dollars of deferred membership fees, which is cash collected before the revenue is recognised.
Typing a receivables balance into a forecast is typing in an answer. Expressing it as days of sales makes it a consequence of the revenue line, which is where it belongs.
Turn three balances into three day counts
- Inventory days: inventories divided by merchandise costs, times 365. For fiscal 2025 that is 18,116 over 239,886, times 365, or 27.6 days.
- Receivable days: receivables divided by net sales, times 365. That is 3,203 over 269,912, times 365, or 4.3 days.
- Payable days: accounts payable divided by merchandise costs, times 365. That is 19,783 over 239,886, times 365, or 30.1 days.
- Add the first two and subtract the third. 27.6 plus 4.3 less 30.1 is a cash conversion cycle of 1.8 days.
- Repeat on the prior year to see whether the counts are stable: 30.6, 4.0 and 31.9 days, for a cycle of 2.7 days.
- In the forecast, hold each day count and let the balances follow from the forecast sales and merchandise costs. Changing a day count is then an explicit assumption with a cash consequence you can read.
Three day counts, two filed years
- Inventory days, FY202527.6 days
- Inventory days, FY202430.6 days
- Receivable days, FY20254.3 days
- Payable days, FY202530.1 days
- Payable days, FY202431.9 days
What a cycle of 1.8 days means
The company sold and collected on its inventory in about 31.9 days and paid its suppliers in about 30.1. The difference is a day and a half, which means the supplier base funded almost the whole of the inventory on the shelves.
That is why the same business can grow net sales by 20,287 million dollars in a year without a corresponding demand for working capital. In a model, this shows up as a working capital movement near zero, and if your forecast produces a large one you have changed a day count without meaning to.
The fourth balance, which is not a day count
Deferred membership fees stood at 2,854 million dollars at 31 August 2025 against 2,501 million a year earlier. This is cash already received for a membership period not yet elapsed, so it is a liability that will be settled by delivering service rather than by paying cash.
Model it against members and the annual fee, not against days, because that is what drives it. Its growth of 353 million dollars in the year is cash the business collected ahead of the revenue, and it belongs in the operating section of the cash flow statement.
The trap in the denominator
Inventory and payables belong against merchandise costs, not against net sales, because both are carried at cost. Receivables belong against net sales, because that is what customers owe.
Using sales as the denominator for all three is a common shortcut and it produces day counts that look sensible and move wrongly. At an eleven percent gross margin the error is about eleven percent of the count.
Check yourself
Which denominator belongs under inventory and payables?
- Net sales, for both
- Merchandise costs, because both balances are carried at cost
- Operating income
Show the answer
Answer: B.
Using sales inflates or deflates the count by the gross margin. Receivables are the exception, because customers owe the sales value.Costco's fiscal 2025 cash conversion cycle was 1.8 days. What does that say?
- That the company collects before it sells
- That suppliers funded almost all of the inventory, so growth required very little working capital
- That inventory turns once a year
Show the answer
Answer: B.
Inventory plus receivable days of 31.9 against payable days of 30.1 leaves the supplier base financing nearly the whole cycle.How should deferred membership fees be modelled?
- As days of net sales
- Against the member count and the annual fee, because that is what drives the balance
- As part of long-term debt
Show the answer
Answer: B.
It is cash collected for a membership period not yet elapsed. Its size follows members and the fee, and it is settled by delivering service rather than cash.Sources
- Costco Wholesale Corporation, Form 10-K for the fiscal year ended 31 August 2025, filed 2025-10-08, accession 0000909832-25-000101: the consolidated balance sheets and statements of income.
What this leaves out
- Every day count here is this course's arithmetic on year-end balances, which is a point in time and can differ from the average balance across the year, particularly at a business with a winter holiday peak.
- Receivables are stated net of allowances, as reported.
- A 365-day convention is used throughout; fiscal 2025 was a 52-week year and fiscal 2023 a 53-week year, so week-based counts would differ slightly.
- Nothing here is a view on Costco or on any security.