You may consider using Days of Working Capital as a solid forward indicator in your "Financial" KPI Dashboard. As part of your Performance Management System, this ratio come Key Performance Indicator provides a quick little health check of the key liquidity indicators required to fuel your business's cashflow.
Days of Working Capital is a solid indicator as a general rule, just be aware of some basic mathematics and you'll find that it provides some comfort moving forward. The calculation involves the use of "Annual Sales/365" so by the very nature of the calculation we are averaging Sales. Just be aware of any significant seasonal fluctuations in your operations. As such month to month comparisons can be misleading, alternatively comparing like with like in year on year comparison will assist in benchmarking this metric.
This metric looks at how many days of working capital you have tied up in your business based on your current demand in sales. As a trend line exercise this KPI metric will highlight the inefficient use of resources that make up this measure.
Days of working capital is a function of Accounts Receivable, Inventory, Accounts Payable and Sales. It's represented by the formula (Accounts Receivable + Inventory - Accounts Payable) / (Sales/365). The KPI metric will determine in days the amount of working capital you have tied up in these resources. The higher the days the larger the amount of potential waste that is occurring within your operation.
Efficiency should be determined at the individual resource level. The Days of Working Capital KPI will reflect overall inefficiency / efficiency. Each of the resources within the metric should be investigated for possible variations outside predetermine benchmarks. For instance "Days Receivable", "Days Inventory" and "Days Payable" would further articulate any issues within those individual metrics.
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