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Working Capital Management.


Working Capital is basically the difference between current assets and current liabilities which is often referred to as net working capital.Working capital must be effectively managed to ensure a business firm's viability and sustainability. A failure to manage working capital properly could cause a company to essentially go out of business. Working capital works by effectively managing trade receivables, trade payables, inventory, and sales revenue through the cash cycle.

Days Sales Outstanding ( AR / (Total Revenue/365)

Days sales outstanding involves year -end trade receivables net of allowance for doubtful accounts , plus financial receivables , divided one day of average revenue.

A decrease in DSO represents an improvement in DSO while an increase results in a deterioration which means its taking the company longer to collect funds from customers.

Some companies may have securitized receivables which will improve DSO through financing alternatives without improving the underlying customer to cash processes such as credit-risk assessment , billing, collections, and dispute management.

Days Inventory Outstanding (DIO)

Days Inventory Outstanding is defined as Year-End Inventory divided by one day of average revenue.

A decrease is an improvement as inventory is being depleted faster which does not tie up working capital. An increase is a deterioration which means its taking longer to replenish inventory levels.

Days Payable Outstanding (DPO)

Days Payable Outstanding (DPO) IS year-end trade payables divided by one day of averae revenue.

An increase in DPO is an improvemnt as a business firm takes longer to pay its outstanding obligations. The Longer the better. A decrease is a deterioration as the company is paying its bills faster which reduces cash.

Days Working Capital (DWC)

Days Working Capital (DWC) encompasses year-end net working capital which is trade receivables plus inventory less accounts payable which is divided by one day of average revenue.

The lower the number of days working capital the better which means the firm is using less cash to operate its business.

Note: U.S. Business Reporter uses net sales instead of cost of goods sold when calculating DPO and DIO. Our methodology uses net salesaccross the four working capital categories to allow a more balanced and accurate comparison.