Days Working Capital

Days working capital (DWC) measures how many days it takes a company to convert its working capital into sales. It expresses operational efficiency and short-term liquidity: fewer days means the company is converting resources into revenue more quickly.

Understanding working capital

Working capital (also called net working capital) is the difference between a company’s current assets and current liabilities:
Current assets = cash, accounts receivable, inventories
Current liabilities = accounts payable, short-term debt

Working capital = Current assets − Current liabilities

Positive working capital indicates current assets exceed current obligations; negative working capital indicates the opposite.

Formula

DWC = (Average working capital × 365) / Sales revenue

Where:
– Average working capital = average of working capital over the period (e.g., average of opening and closing balances or quarterly averages)
– Sales revenue = income from sales during the same period

Notes:
– Use 365 (or the number of days in the period) to express the metric in days.
– Average values smooth seasonal or one-off swings.

How to calculate (step by step)

1. Compute working capital for each period: Current assets − Current liabilities.
2. Calculate average working capital for the analysis period (e.g., average of quarterly or opening/closing working capital).
3. Obtain sales revenue for the same period from the income statement.
4. Apply the formula: (Average working capital × 365) ÷ Sales revenue.

Example

A company has:
– Current assets = $500,000
– Current liabilities = $300,000
– Sales = $10,000,000

Working capital = $500,000 − $300,000 = $200,000
DWC = ($200,000 × 365) / $10,000,000 ≈ 7.3 days

If sales rise to $12,000,000 while working capital stays $200,000:
DWC = ($200,000 × 365) / $12,000,000 ≈ 6.1 days

Interpretation: Lower DWC indicates faster conversion of working capital into sales. A company with 3 days is twice as efficient as one with 6 days for the same period and context.

Limitations and cautions

• Industry differences: “Good” DWC varies by industry; compare peers and industry benchmarks.
• Period comparisons: Analyze trends over multiple periods to detect improvements or deteriorations.
• Distortions: Sudden changes in current assets or liabilities (e.g., cash infusions, inventory build-ups, or one-off receivable write-offs) can skew DWC. Averaging across periods reduces volatility.
• Not a standalone measure: Use alongside other liquidity and efficiency metrics (e.g., days sales outstanding, inventory turnover, current ratio) for fuller insight.

Key takeaways

• DWC shows how many days working capital supports sales and serves as a measure of operational efficiency.
• Calculate DWC as (Average working capital × 365) ÷ Sales revenue.
• Interpret DWC relative to industry peers and historical trend lines; watch for distortions from one-off events.