What Is Days Working Capital?

Last Updated May 29, 2024

When trying to determine how much working capital you need, one of the most important areas you need to consider is what’s called “days working capital.” The ability to track your days of working capital is an important part of working capital management and ensuring that your business is able to generate revenue in a timely manner.

Here’s what you need to know about this important aspect of your business’s finances.

What Is Days Working Capital and What Does it Show?

The days working capital definition is the number of days it takes for your business to convert working capital (such as cash, product inventory, and accounts receivable) into revenue. Measuring the number of days it takes to convert working capital into sales is regarded as an important measure of a company’s operational efficiency. The fewer days needed to create sales, the better.

The more efficient a company is in turning its working capital into revenue, the more attractive it becomes to investors. This also indicates that a company is able to consistently meet its financial obligations and engage in activities that help it generate a profit.

How to Calculate Days Working Capital

To calculate your business’s days working capital, you need to know two key pieces of information: your average working capital over a set period and your total sales revenue for that same time frame.

To measure your working capital, add up the total of your company’s current assets, then subtract its current liabilities. If you’re trying to measure an average over a longer period of time (like a quarter or year), an easy way to find the average is to calculate your working capital at the beginning and end of the time period. You should be able to find this information on your business balance sheet. Average those results to get your average working capital.

Next, use your income statement to determine your total revenue from sales during the period that you’re measuring. With this information in hand, you have everything you need to calculate days of working capital.

It’s important to note that days working capital calculations don’t really work for businesses that currently have negative working capital. This would result in a “negative” days working capital result, which is essentially meaningless.

Days Working Capital Formula and Calculation

The days of working capital equation is:

Days Working Capital = (Average Working Capital x 365) / Total Sales Revenue

The result of this calculation tells you the number of days it takes to turn your working capital into sales.

Understanding Days Working Capital

While the formula to calculate days working capital is fairly straightforward, understanding what these numbers actually mean for your business can be a little more complicated. For one thing, what is considered “good” or “bad” days working capital can vary from one industry to another. Some industries inherently take longer to convert working capital into sales, so it doesn’t do much good to compare your company to a business in a different industry.

By comparing your days working capital to others in your same industry, you can gauge whether you need to take additional steps to improve your operational efficiency. It can also be helpful to compare your current days working capital with results from previous periods. This will allow you to track your progress and identify changes in your operating efficiency over time.

High vs. Low Days Working Capital

Generally speaking, the lower your days working capital, the better. This means that it takes fewer days to turn working capital into revenue. High days working capital means that it takes longer to make sales, which could make it harder for your business to manage its financial obligations if you experience a decrease in sales or another financial setback.

However, days working capital can sometimes give the wrong impression without the full context of your financial picture. For example, consider a period where your company gets a sudden increase in current assets outside of its typical sales sources. Even though the company’s total working capital has improved, this would likely increase its days working capital.

Because of this, days working capital is typically calculated over a year (or multiple quarters), so that one-time events don’t throw off the calculations.

Days Working Capital Example

As an example of days working capital, let’s say your company makes $5 million in sales during a calendar year. During the same time, its current assets total $300,000 and current liabilities total $200,000.

Start by calculating the company’s working capital ($300,000 – $200,000 = $100,000). Multiply that total by 365 to get 36,500,000. You would then divide that total by your total sales (5,000,000).

This gives a result of 7.3, meaning that your company’s days working capital for that year was 7.3 days. If your sales numbers increased while the net working capital remained the same, your days working capital would decrease. On the other hand, if your net working capital increased while sales numbers remained flat, the days working capital would also increase.

How to Decrease (and Improve) Days of Working Capital

Many businesses want to know how to decrease days of working capital. And, in reality, it’s fairly straightforward. If you want to decrease days of working capital, you need to increase your sales. Your ability to convert working capital into more sales is a key measure of your business’s efficiency.

So, how can you do this? Depending on how you bill your clients, you could consider implementing shorter payment terms so that you receive payments from clients faster. Improving your invoicing processes to ensure that clients pay in a timely manner will help ensure that outstanding account balances actually turn into completed sales for your business.

Many businesses benefit from invoice factoring, in which they sell their outstanding invoices in exchange for a cash advance on the invoices. With this process, the unpaid invoice has essentially been converted into a sale. While business owners have to pay factoring fees for this service, it means they don’t have to worry about tracking down payments from clients and have more immediate access to needed cash.

Alternatively, you could invest in marketing or growth initiatives that help drive sales of your products or services. By increasing your sales numbers, you will decrease your days working capital and improve the overall operational efficiency of your business.

Another practice to improve days working capital is to optimize your inventory management. Practices that prevent product shortages or the buildup of excess inventory will ensure that you don’t have too much working capital tied up in unsold inventory. This way, your inventory will truly remain a short-term asset that can be sold in a timely and efficient manner.

However, focusing on how to improve days of working capital doesn’t always need to be the top financial goal for your business. In some cases, actions you take to improve working capital or cash flow could make days working capital appear worse. For example, selling a fixed asset or taking out a loan to improve cash flow can lead to a substantial bump in working capital without influencing your sales. While this could cause your days working capital to increase, the added cash flow could be more important to your current financial situation.

Remember, while days working capital is often a good measure of your operational efficiency, it doesn’t tell the whole story on its own. Decreasing your days working capital is a good goal, but you should be mindful of the specific activities affecting your working capital during that time period as well.

Days Working Capital FAQs

What is the average days working capital?

The average days working capital varies between industries and businesses. To calculate your own average days working capital, take your average working capital for the period you want to measure, multiply it by 365, and then divide that total by your business’s total sales revenue during that same period.

What is the difference between days working capital vs. cash conversion cycle?

Days working capital measures the average number of days it takes a business to convert its working capital into revenue. The cash conversion cycle, on the other hand, is specifically focused on how long it takes for inventory to go through the purchase to sales process to generate cash.

What is the difference between days working capital vs. operating cycle?

The operating cycle measures the number of days between when a business pays suppliers and when they receive cash from their own sales. Days working capital measures the amount of time it takes a business to convert its current assets into revenue.

Is it better to have high or low days working capital?

It is generally better for businesses to have low days working capital, as this indicates that the company is being more efficient at converting its working capital into revenue. That being said, a business could have a period where its days working capital increases due to an unusual increase in assets, even when other liabilities and sales activities remain the same.