Days Working Capital
Categories: Accounting, Company Management
In retail, one of the nightmares for a business lies in having inventory sitting on the shelves, doing a whole lot of nothing, like a Congressman. The longer it takes to convert that inventory into cash by um, selling it...the more the cumulative cost of goods goes up. There is a capital cost in working capital. The loan on that fat brand spanking new smelting factory wasn't free, ya know. The time it takes to create liquidity from goods or services requires working capital...capital the business deploys or works with, to eventually create profits from sales of their inventory.
The days working capital is a calculation derived from two key balance sheet items: current assets and current liabilities. To get the ratio, you subtract current liabilities from current assets. The smaller the days working capital difference, the stronger the liquidity position of the company. You can imagine that if you had like tons of "excess" capital to work with (say, 1,000 days of working capital) then your company is probably in excellent financial shape and you can generally sleep at night if you're the one running it.
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Finance: What is working capital?268 Views
finance a la shmoop. what is working capital? alright people say we're opening
a lemonade stand. I seed what you did there. unfortunately we can't just blink [man stands in front of stage]
our eyes like Aladdin's genie and you know make it all happen. magically we
don't need a ton of money to start things but we need some money in advance. [genie comes out of lamp]
of you know when we begin collecting revenues well we have to rent a location,
and pay six months rent in advance, and we got to buy about 87 pounds of
sugar and 4,000 lemons and hundred fourteen huge bottles of purified water,
oh and cups we need eight thousand cups. all told it costs about 50 grand in
capital, working capital. see we did there, we need before we can start to run the
business, and you know pay employees and so on .so we get an investor TBOG. the [people stand in line for lemonade]
bank of Grandma. yeah we love her. she gives us a hundred grand. well that
entire hundred grand invested into our little business is our total working
capital. right? fifty grand and start the business working and we got 50 left over
or just in case things don't start up as quick as we hope .its capital that lets
us start working. in cleverly named there. all right well 50 grand we know we're
gonna spend 50 grand and cover the time in between when we're up and running and [calendar]
revenues and all the other stuff start to kick in. and well yeah it's that
simple. put together an actual drinkable lemonade recipe ?well that's just a
little bit harder. working capital. live it love it breathe it. [ grandma grimaces]