Working capital days help us assess, how long cash is tied up for in the business Let's use an example of receivables days to get us started Receivables days, tells us how long we give our customers to pay our bills on average How to we calculate this? Well you take the ending receivables amount from the balance sheet (that may be the end of the year) and you divide that by the sales for the same period (the year) I'm gonna make up some figures, let's say my ending receivables was 10 and my sales for the year was 120 I can clearly see the that is about 1/12. 1/12 of my sales has still not been paid by my customers 10 of the 120 is outstanding If 1/12 is still outstanding then I give my customers about a month to pay their bills We want to work it out a bit more exact than that, the numbers won't always be so kind So I then multiply that by the number of days that the sales represents In this case I said a year so it would 365 days Now we have a couple more days ratios as well The first one is inventory days, you take the ending inventory in the balance sheet and you divide it by the cost of goods sold and then you multiply it by the number of days that COGS represents (in this case a year) So what does this tell me? It tells me the period that I hold my inventory for If I'm holding my inventory for months and months and months, it might indicate that I'm holding inventory needlessly and cash is being tied up in that inventory needlessly Third one is the payable days period This is where I take my ending payables from the balance sheet and again divide it by COGS I then multiply it by the number of days that COGS represents Again in this case a year, so it'll be 365 days What does this tell me? It tells me the length of time that it takes me to pay my suppliers So let's say we calculated this and it came it as 20 days But if my suppliers have given me 30 days to pay my bills, then I'm paying them early I should hold on to their cash for the full 30 days. Of course, I want to make sure I don't annoy my suppliers and I don't lose out on any early repayment discounts So very useful to calculate your days ratios Now you might notice in each case we use the ending receivables, ending inventory, ending payables at the end of the balance sheet date You can of course use average balances to calculate the ratios Average balances are commonly used by credit analysts, ending balances for forecasting