What is days of working capital

Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Free Investment Banking Course. Login details for this Free course will be emailed to you. Forgot Password? Free Ratio Analysis Course. Article by Madhuri Thakur. What is Days Working Capital?

Important Definitions Working Capital: The difference between the Current Assets Current Assets Current assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. They're usually salaries payable, expense payable, short term loans etc. Current Assets: Assets that could be realized, used, or extinguished in a normal operating cycle Operating Cycle The operating cycle of a company, also known as the cash cycle, is an activity ratio that measures the average time required to convert the company's inventories into cash.

Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. It shows how long cash is tied up in the companies working capital. Ending balance sheet amounts are commonly the basis for forecasting forward and are used in the formulas shown above.

Some analysts typically credit analysts use an average balance figure for the period instead. However, the ending balance is preferred for forecasting.

The operating cash cycle uses the three ratios to measure the efficiency of a business by showing how much time is needed between the acquisition of raw materials and the receipt of cash from customers. It is like an OWC calculation but expressed in days rather than monetary amounts, so inventory and receivable days the assets are added and payable days the liability is subtracted.

The net product is the number of days for which funding is tied up or released. For this business, on average it takes 30 days from the acquisition of product until its delivery to customers, following a sale. The customers then take 25 days to pay after receipt of the goods. Meanwhile, it takes the business 50 days to pay its suppliers for the product. We can, therefore, say 50 days of this cycle is funded for free by the supplier leaving 5 days funding shortfall.

This means that for getting sales of 1 dollar, we are investing only 1 dollar in working capital which was 1. Same effect on EBT will be there as we explained above. We can express the Days of Working Capital like following as well. It is because ultimately in this ratio, we are only comparing the short term current assets and liabilities with sales of the company. With this representation, the objective becomes clearer for the management.

We need to reduce the side of current assets and increase the side of current liabilities for improving the overall DWC. We can see that a lot of money is stuck in cash and marketable securities 1. The finance manager can always take this area into priority and analyze if the amount of cash and marketable securities can reduce without negatively impacting the smooth working capital cycle.

Look at the following images excerpts from the book Financial Management , Theory and Practice, 13e, by Brigham and Ehrhardt. We can see that the DWC of companies varies from 51 days to days. These wide variations in DWC, you may dedicate to the different operating environment of different industries.

But there are huge variations within industries also. Just see below:. This is why we say that this metric is very important and the management of a company should work on improving the same. Investors use this ratio of days of working capital to analyze or make a comparison between different companies of the same sector.