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Days working capital is a term that refers to the number of days it takes for a business to convert its working capital into actual revenue. This calculation is important, since it can help a business identify how efficiently the company is currently functioning. Once the days working capital is determined, the business can use the data to look closely at how that ratio compares to other companies working in the same industry, and decide if there is a need to streamline the operation in an effort to shorten the conversion time.
In order to understand how the process functions, it is necessary to grasp the nature of working capital. Essentially, working capital is the ability of a company to meet its short-term debt obligations with the current assets on hand. Current assets refer to any cash that is in the operating account as well as any outstanding balances in the accounts receivables of the business, and the value of the current inventory. The idea behind working capital is to confirm the business does have access to assets that can be called upon to meet those obligations in a timely manner.
The basic formula for calculating days working capital requires identifying the average working capital and multiplying that figure by 365, the number of days in the calendar year. This figure is in turn divided by the sales revenue of the business. The final total of this calculation yields a daily total that can be compared to the amount of total short-term obligations. If the company can cover those obligations in just a few days, then the days working capital is said to be excellent. Should the calculation indicate that it takes many days to convert working capital into revenue, that is a sign that the current operational process could use some improvement.
This type of fundamental analysis is important to the ongoing life of a business. By comparing the days working capital of one period to that of previous periods, it is possible to identify negative trends that could create serious issues at a later date. By isolating those factors sooner rather than later, the company is able to take steps to correct any situations that are having a negative impact on the operation and creating the longer delay in converting working capital into revenue. As a result, the business remains fundamentally sound and can continue operations as long as the ratio remains within an acceptable level.
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