Working capital days looks at how long it takes you to do certain things in your business. Let's start by looking at receivables days. Receivables days says you take your ending receivables figure from your balance sheet and divide it by sales. Imagine your sales was 120 and your receivables is 10. This tells us that of the sales, 1/12 of it has not been received from customers yet, they owe you 10 out of the 120.

Well, we can do something with that. That tells me how long I'm giving my customers to pay their bills. The sales of 120 is the sales for a whole year and 1/12 of it hasn't been received yet. Then we're giving our customers 1/12 of a year or about a month to pay their bills. Now, the numbers aren't always quite so kind to us so to make it a bit more exact, we multiply it by the number of days of sales, and in this example, that would be a year of days being 365. If we were to compare these receivables days over time for a business, we'd like to see those receivables days staying relatively flat or declining. We want to be giving our customers less time to pay their bills. Next up, we have the inventory days where you take the ending inventory over cost of goods sold and times it by the number of days of COGS. If this showed me that my inventory days was 30 days then that tells me I'm holding my inventory for 30 days before I sell it. Similar to the receivables, if I looked at this over time, I'd like this number to either be flat or declining because a low inventory days is good. We want to be holding onto our inventory for as little time as possible before it's sold. And lastly, payables days. Again, we take payables over cost of good sold times by the number of days of COGS, such as 365. This tells me the number of days it takes me to pay my suppliers. And ideally, I'd like this to be as high as possible, but obviously, without annoying my suppliers. When we put all of this together, it helps the company work out how good it is at managing its cash. Does it take a long time to get cash from its customers? Receivables days. Does it have inventory for a long time before it's sold? Inventory days. And does it take a really short time to pay its suppliers or a really long time to pay its suppliers? Payables days.