Off the Shelf: The 2004 Working Capital Survey

Low inventories drove down working capital last year. But will that continue as the economy improves?

Tim Reason is a senior writer at CFO.

See the 2004 Working Capital tables

How Working Capital Works

Days Sales Outstanding: AR/(net sales/365)

Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by net sales per day.

A decrease in DSO represents an improvement; an increase, a deterioration. On the chart, which begins below, companies marked with an asterisk have securitized receivables, which can artificially improve DSO without changing actual cash-to-order processes. The survey eliminates this distortion by adding the receivables back on the balance sheet before calculating DSO.

Days Payables Outstanding: AP/(net sales/365)

Year-end trade payables divided by sales per day.*

An increase in DPO is an improvement, a decrease indicates a deterioration. For purposes of the survey, payables exclude accrued expenses.

Days Inventory Outstanding: inventory/(net sales/365)

Year-end inventories divided by sales per day.*

A decrease in DIO is an improvement, an increase is a deterioration.

Days Working Capital: (AR + inventory ­ AP)/(net sales/365)

Year-end net working capital (trade receivables plus inventory, minus AP) divided by sales per day.

The lower the number of days working capital, the better. On the survey table, a DWC change of -X% reflects an improvement (even if DWC itself is negative), while a DWC change of +X% reflects a deterioration. The percent change is marked N/M (“not meaningful”) if DWC moved from a positive to a negative number, or vice versa.

*Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO.

REL Consultancy Group, which conducts CFO’s survey, uses net sales across each working capital component to allow a balanced comparison across each DWC element and provide true comparisons between industries. Reported sales have been adjusted for acquisitions and disposals during the year.

To ask questions about REL Consultancy Group’s methodology, or to benchmark your own company using the REL methodology, visit

Transatlantic Tie

After years of lagging behind, European companies finally equal their American counterparts when it comes to working capital.

The end of the financial bubble in Europe was evident in last year’s survey, when a squeeze on balance sheets caused a remarkable 83 percent of European industry sectors to report net declines in working capital. “Europe had a lot of fat, and it was easy to get rid of,” says Marc Loneux, REL Consultancy Group’s chief financial analyst. Although traditionally better at managing working capital, U.S. companies were already well into a downturn, and couldn’t match Europe’s burst of performance. Just 59 percent of U.S. sectors reported DWC reductions in last year’s survey, and average DWC was reduced by less than one-third of the average European reduction.


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