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CHAPTER FIVE: Liquidity Measurements > DAYS OF WORKING CAPITAL

DAYS OF WORKING CAPITAL

Description: A company can use a very large amount of working capital to generate a small volume of sales, which represents a poor use of assets. The inefficient asset use can lie in any part of working capital—excessive quantities of accounts receivable or inventory in relation to sales, or very small amounts of accounts payable. The days of working capital measure, when tracked on a trend line, is a good indicator of changes in the efficient use of working capital. A low number of days of working capital indicates a highly efficient use of working capital.

Formula: Add together the current balance of accounts receivable and inventory and subtract accounts payable. Then divide the result by sales per day (annual sales divided by 365). The formula is:


  

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