Working Capital Days is a financial measurement and can be used as a Key Performance indicator (KPI).  

It is calculated as follows: (Current assets – Current liabilities) / (sales revenue / 365)

It shows how many days a business can survive after paying its current liabilities.

For example
Current Assets $20,000,000
Current Liabilities $8,000,000
Annual Sales of $13,000,000

12,000,000 / (13,000,000 / 365)
= 336.92 days

Generally, the larger the number the better, as you will have greater reserves.

Working capital includes accounts such as:
-    Cash
-    Inventory
-    Work in progress
-    Accounts receivable,
-    Accounts payable
-    Other debts due within 1 year

Working capital shows the results of a combination of accounts including: inventory management, debt / liability management, revenue collection and payments to suppliers.

A decreases in days working capital may suggest that a business is:
-    Overleveraged
-    Finding it difficult to maintain or grow sales
-    Paying suppliers too quickly
-    Collecting receivables too slowly

Increases in days working capital may suggest that a business is:
-    Underleveraged
-    Experiencing high sales growth
-    Paying suppliers too slowly
-    Collecting receivables too quickly

If business don’t monitor their working capital days, they may run out of cash.  This can be averted if business finance their operations to ensure the steady flow of cash throughout the year.  For example instead of purchasing an asset using cash use a financing option instead.

If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com

Please refer to disclaimer at the bottom of the page.