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Days Working Capital

What is 'Days Working Capital'

Days working capital is an accounting and finance term used to describe how many days it takes for a company to convert its working capital into revenue. It can be used in ratio and fundamental analysis. When utilizing any ratio, it is important to consider how the company compares to similar companies in the same industry.

Explaining 'Days Working Capital'





Working capital is a measure of liquidity, and days working capital is a measure that helps to quantify this liquidity. The more days a company has of working capital, the more time it takes to convert that working capital into sales. In other words, a high number is indicative of an inefficient company and vice versa.

Working Capital

Working capital is calculated by subtracting current liabilities from current assets. Current assets include cash, marketable securities, inventory, accounts receivable and other short-term assets to be used within the year. Current liabilities include accounts payable and the current portion of long-term debt. These are debts that are due within the year. The difference between the two represents the company's short-term need for, or surplus of, cash. A positive working capital balance means current assets cover current liabilities. A negative working capital balance means current liabilities are more than current assets.

Interpreting Days Working Capital

The formula for days working capital is the product of average working capital and 365 divided by annual sales. For example, if a company makes $10 million in sales and has working capital of $100,000, the days working capital is calculated by multiplying $100,000 by 365 and then dividing the answer by $10 million. The answer is 3.65 days. However, if the company makes $100 million in sales the answer is 0.365 days.


Further Reading


Effect of working capital management on firm profitability: Empirical evidence from India
journals.sagepub.com [PDF]
… This suggests that an increase in number of days a firm receives payment from sales affects … suggests that a decrease in the number of day's accounts receivable by 1 day is associated … These findings are in line with the working capital management rule that firms should strive to …

Does working capital management affect profitability of Belgian firms?Does working capital management affect profitability of Belgian firms?
onlinelibrary.wiley.com [PDF]
… This suggests that an increase in number of days a firm receives payment from sales affects … suggests that a decrease in the number of day's accounts receivable by 1 day is associated … These findings are in line with the working capital management rule that firms should strive to …

Effects of working capital management on SME profitabilityEffects of working capital management on SME profitability
www.emerald.com [PDF]
… This suggests that an increase in number of days a firm receives payment from sales affects … suggests that a decrease in the number of day's accounts receivable by 1 day is associated … These findings are in line with the working capital management rule that firms should strive to …



Q&A About Days Working Capital


Are there other ways to calculate Days Working Capital?

Yes, there are other ways to calculate Days Working Capital. One way is using Average Current Assets and 365 divided by Annual Sales or Revenue. Another way is using Average Current Liabilities and 365 divided by Annual Sales or Revenue. Both methods will give you the same answer, but they may not be as accurate as calculating it with Average Working Capital and 365 divided by Annual Sales or Revenue because it takes into account all accounts receivable instead of just accounts receivable less than 90 days past due which would be used when calculating with Average Current Assets and 365 divided by Annual Sales or Revenue."

What does a positive number in days working capital mean?

A positive number in days working capital means that current assets cover current liabilities.

What is the formula for days working capital?

The formula for days working capital is the product of average working capital and 365 divided by annual sales.

What does a negative number in days working capital mean?

A negative number in days working capital means that current liabilities are more than current assets.

How can you use this information to make better decisions about companies?

You can use this information to make better decisions about companies by comparing them to similar companies within their industry.

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