What is working capital days?
Days of working capital is a deadline concerning the number of days required by the company to convert its working capital into actual income. This calculation is important because it can help businesses identify how efficiently the company works. Once working capital is determined, the company can use data to investigate in detail how this ratio compared to other companies working in the same industry and decide whether to reduce this operation in an effort to reduce the transfer period.
In order to understand how working capital days work, it is necessary to understand the nature of working capital. In principle, working capital is the ability of the company to meet its short -term debt obligations with current assets at hand. current assets refers to any cash that is on the operating account, and any outstanding balances in receivables to accounts and the value of the current inventory. The darkness that stands behind the working capital is to confirmthat the company has access to assets that can be invited to fulfill these obligations in time.
The basic formula for calculating working capital days requires identification of average working capital and multiplying this number by 365, number of days per calendar year. This number is divided by sales from business. The final set of this calculation provides a daily total number that can be compared with the amount of total short -term liabilities. If the company can cover these obligations in a few days, then it is considered excellent working capital. If the calculation suggests that the transfer of working capital to income takes many days, a sign that the current operational process could use some improvement.
This type of basic analysis is important for the ongoing life of business. By comparing working capital days of one period with previous periods it is possible to identify negativeTrends that could create serious problems later. The insulation of these factors earlier than later, the company is able to take steps to correct all situations that have a negative impact on the operation and create longer delays when converting working capital into income. As a result, the company remains fundamentally healthy and can continue to operate if the ratio remains at an acceptable level.