Working Capital Days is a measurement of a business’ liquidity. Working Capital Days provides information on how quickly a business can pay its current liabilities. The faster assets can be converted to cash the greater chance a business will be able to pay its debts.
3 common accounts that contribute to Working Capital Days are:
- Accounts Payable
- Accounts Receivable
- Work in Progress; and
- Stock on Hand
Accounts Payable Days also known as Trade Creditor Days represents the average time taken for a business to pays its suppliers.
Accounts Receivable Days also known as Trade Debtors represents the average time taken for customers / clients to pay a business.
Work in Progress (WIP) Days measures the average number of days that a job (clients / customer work) is in progress prior to invoicing. WIP may contain the cost of raw materials, labour and overhead costs incurred for products that are at various stages of being completed.
Stock on Hand Days also known as Inventory Days measures the average number of days a business holds its inventory prior to selling it.
Therefore, Working Capital Days calculates how many days it takes a business to convert its working capital to cash. Or the amount of time taken between a business paying for stock and when the customer / clients pays the business.
For Example:
- You purchase some materials on 30 day credit terms. (Accounts Payable)
- It takes 15 days for your staff to complete the project that contains these materials. (WIP)
- The finished product is not sold for another 25 days. (Stock on Hand)
- The client / customer that you sell it to is given 14 days to settle their account. (Accounts Receivable)
Therefore:
Total Working Capital Days is 14 + 25 + 15 – 30 = 24 days
If you would like to discuss further please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com
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