What is Days Working Capital (DWC)?
– Days Working Capital measures how many days, on average, a company takes to turn its working capital into revenue. In plain terms: how long cash is tied up in operating assets (like inventory and receivables) before being converted back into sales proceeds.
Core definitions
– Working capital (also called net working capital): Current assets minus current liabilities. Current assets include items expected to convert to cash within the normal operating cycle (cash, accounts receivable, inventory). Current liabilities are obligations due within that cycle (accounts payable, short-term debt).
– Days Working Capital (DWC): The number of days covered by the company’s net working capital relative to sales.
Why DWC matters
– DWC is a short-term efficiency and liquidity indicator: fewer days implies the company converts its working capital into sales faster. More days implies cash is tied up longer, which can be a sign of inefficiency or slower collections/inventory turnover.
– It is most useful when compared to peers in the same industry or when tracked over time for the same company.
Formula and calculation (step-by-step)
1. Compute working capital:
Working capital = Current assets − Current liabilities
2. If possible, average working capital across the period to smooth one-off swings:
Average working capital = (Beginning working capital + Ending working capital) / 2
(You can average more observations if available.)
3. Use sales (revenue) for the same period (typically annual sales).
4. Calculate DWC:
DWC = (Average working capital × 365) / Sales revenue
Note: some analysts use 360 days for certain conventions; pick one and remain consistent.
Worked numeric example (two scenarios)
Assumptions: company reports for a 12‑month period.
Scenario A
– Current assets = $500,000
– Current liabilities = $300,000
– Sales = $10,000,000
– Working capital = $500,000 − $300,000 = $200,000
– If we use that single-period working capital as the average:
DWC = ($200,000 × 365) / $10,000,000 = 73,000,000 / 10,000,000 = 7.3 days
Scenario B (greater sales, same working capital)
– Sales increase to $12,000,000; working capital stays $200,000
DWC = ($200,000 × 365) / $12,000,000 ≈ 6.08 days
Interpretation of the example
– With the higher sales figure and unchanged working capital, DWC falls (from ~7.3 to ~6.1 days). That means the firm is generating more sales per dollar of working capital and thus converting capital into revenue more quickly.
Quick checklist — what to gather and verify before computing DWC
– Collect current assets and current liabilities for the period (and beginning balances if you’ll average).
– Use sales revenue for the same period (annualize if you only have a shorter period).
– Decide on 365 vs. 360 days and apply consistently.
– Check for one-time events (large cash inflows, asset write-downs, seasonal inventory build) that could distort the metric.
– Compare against industry peers and historical periods rather than using an absolute “good/bad” threshold.
– If possible, break DWC into components (days inventory outstanding, days sales outstanding, days payable outstanding) for deeper diagnosis.
Limitations and cautions
– DWC alone does not prove good or poor performance — industry norms and trends matter.
– Sudden increases in current assets (for example, a cash infusion) can raise DWC even though the company’s liquidity actually improved.
– Differences in accounting policies (inventory costing, revenue recognition) and seasonality can make cross-company comparisons misleading.
– Use averages and multiple periods to reduce noise from one-off events.
How to use DWC in practice (simple workflow)
1. Compute/verify working capital and sales for each period.
2. Calculate average working capital for the period you analyze.
3. Compute DWC with the formula above.
4. Compare the result to (a) the company’s historical DWC, and (b) peer companies within the same industry.
5. If DWC is rising, drill into changes in receivables, inventory, and payables to find the cause.
Sources for further reading
– Investopedia — Days Working Capital: https://www.investopedia.com/terms/d/days-working-capital.asp
– Corporate Finance Institute — Days Working Capital: https://corporatefinanceinstitute.com/resources/knowledge/finance/days-working-capital/
– AccountingTools — Days Working Capital: https://www.accountingtools.com/articles/days-working-capital.html
– Khan Academy — Liquidity ratios (background on related metrics): https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-statements/liquidity-ratios
Educational disclaimer
This explainer is for educational purposes only. It does not constitute investment advice or a recommendation to buy or sell any security. Always perform your own analysis or consult a licensed professional before making financial decisions.