Businesses use financial metrics to measure their performance over time. One such metric is Days Working Capital (DWC) which shows us the number of days the company takes to convert working capital into sales revenue. Many investors use DWC as a liquidity indicator to track working capital management efficiency.
In this article, we explore some factors that can influence DWC. We will also look at how to calculate Days Working Capital and how to analyze the metric.
What is Days Working Capital?
Days Working Capital (DWC) is a good indicator of whether or not a company can cover its short-term expenses.
When analyzing DWC, it is essential to remember that it varies significantly between companies and industries. Usually, it makes more sense to analyze the ratio and see how the company manages it over time. The higher the metric, the longer it takes the company to turn working capital into sales. Conversely, a lower DWC means the company operates more efficiently.
Several factors can affect a company’s Days Working Capital, and there are several ways businesses can improve their liquidity. By understanding the metric and the methods, businesses can better manage their working capital and ensure they have the resources they need to cover their short-term expenses.
Calculate Days Working Capital
We can calculate the metrics with the following formula:
- Avg WC is the average working capital balance for the period
- Sales must reflect the same period
- 365 should be adjusted to reflect the days in the period
If we divide total Sales for the period over the number of days in the period, we can also calculate DWC as follows:
We can calculate the average working capital as the difference between the average current assets and current liabilities at the beginning and end of the period.
The DWC calculation only works if the company has a positive Working Capital. If WC is negative, the business is already struggling to pay off short-term liabilities.
We also need to consider significant one-off cash inflows during the period as these will artificially inflate the Days Working Capital metric.
Signs that your company needs more working capital
- Low cash flow: A business with low cash flow may have trouble covering its short-term expenses, leading to a decrease in its DWC.
- Limited inventory: When a company’s stock decreases, it will need to invest in more goods and will have less money to cover its short-term expenses.
- High accounts receivable: If a company has a lot of accounts receivable yet to be collected, it will have less money to cover its short-term expenses.
- Seasonal sales: A business that experiences seasonal fluctuations in sales may have low DWC during certain times of the year.
These are a few signs that a business may need more working capital. If you notice any of these factors, it’s crucial to take action to review and improve liquidity.
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How to improve your company’s liquidity with working capital
When a company is experiencing low liquidity, several steps can be taken to improve its situation. One way to achieve this is by improving its working capital. There are several ways a business can improve its working capital, including:
- Reviewing expenses: A company should regularly review its expenses to see where it can cut costs.
- Managing inventory: A company can manage its inventory levels using just-in-time delivery or consignment inventory.
- Offering discounts: A business can offer early payment discounts to customers to encourage them to pay sooner, thus improving collections.
- Obtaining financing: A company can obtain financing through loans, lines of credit, or factoring.
- Improving collections: A business can further improve its accounts receivable collections by implementing an accounts receivable policy.
These are just a few ways a company can improve its working capital. By taking these steps, a business can better manage its liquidity and ensure it has the resources it needs to cover its short-term expenses.
Using the Days Working Capital Template on Magnimetrics
To make calculating your Days Working Capital easier, we have prepared a template on the Magnimetrics platform that you can use and modify as needed.
Prep Step: Get Your Free Magnimetrics Account
To use the Days Working Capital template (and others we are constantly adding), first, you need to have a Magnimetrics account. You can get one for free (no credit card required).
Ready to start? Get your free account today and see how Magnimetrics can help you translate your existing company data into meaningful insights.
Step 1: Import the Days Working Capital Template to your Projects
You can find the Days Working Capital template in the Start With a Template section on the Dashboard.
You can also use the New Project button on the Projects screen and select the Days Working Capital template from the menu.
Either way, make sure to select the Copy Over Sample Data option. This will ensure all necessary data points are available in your project.
Step 2: Adjust the inputs on the Assumptions tab
After you import the template, the app will take you to the dashboard for your new project.
First, you should go to the Assumptions tab to adjust the length of your analyzed periods (in days) as needed:
- PERIOD_DAYS: the number of days in a period
Step 3: Import your data
(If you only want to see how the template works with the dummy data, skip this step)
Click on the Data Imports link on the left. This template has two import templates:
- Balance Sheet: I have imported a sample summarized balance sheet for the company, which we can use to calculate short-term assets and liabilities.
- Income Statement: We have a corresponding income statement, as we need the Sales figure for each period.
Step 4: Run the Days Working Capital report
Once you have adjusted and imported all the necessary data points, go to the Reports tab, where you can Launch the Days Working Capital report.
The software will execute the report and present a summary Days Working Capital calculation table. It will also narrate how DWC has developed over the analyzed periods.
If you yearn for adventures and want a better idea about how everything works, click Edit Report to see how the report is constructed, see how we add logic and tables or adjust everything to your liking. To get the complete picture, you can also visit the Formulas tab, where you can see how the template calculates each step.
Step 5: Download the Results in PDF
Once you are happy with how it looks, you can use the button on the top right to export the report as a PDF.
Days working capital (DWC) is a metric used to measure a company’s liquidity. DWC is a good indicator of whether a company can cover its short-term expenses and whether the company manages working capital efficiently.
Several factors can affect a company’s DWC, but there are also several ways businesses can improve their liquidity. By understanding both the metric and the methods, businesses can better manage their working capital and ensure that they have the resources they need to cover their short-term expenses.
Is DWC something you track? Do you have experience with how to best use the metric to improve company operations? If so, please share them in the comments below! Also, don’t forget to show your support by sharing the article with colleagues and friends.
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