What should working capital target be in terms of operating expenses?

The ideal working capital target in terms of operating expenses is commonly set at a minimum of at least 45 days' worth. This standard is important because it ensures that an organization has enough liquidity to cover its short-term operational needs and manage unforeseen expenses without relying excessively on external financing.

Having 45 days' worth of operating expenses as a target provides a buffer that can help maintain smooth operations. This timeframe is generally seen as a sufficient amount to accommodate the typical delays in cash inflows that can occur due to various reasons, such as delayed payments from customers or fluctuations in operating revenues.

While some organizations may opt for higher targets, such as 60 days, this can lead to inefficiencies if excess liquidity is not being utilized effectively. The 45-day benchmark strikes a balance, allowing for financial stability while encouraging efficient use of funds. Establishing a target of working capital that aligns with operational requirements facilitates better financial planning and operational resilience.