Capital Ideas: The 2005 Working Capital Survey

Despite cheap credit and surplus cash, companies still find plenty of reasons to improve operational efficiency.

How Working Capital Works

Day 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 and improvement; an increase indicates a deterioration. On the chart, 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 is a deterioration. For purposes of this 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 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.


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