Working capital ratios

Accounts Receivable Days = Accounts Receivable / Sales x 365 days

- Inventory Turnover Days = Inventory / Cost of Sales x 365 days

- Accounts Payable Days = Accounts Payable / Cost of Sales x 365 days

Accounts Receivable Days can be a key ratio for interpreting how a business is performing. Not only does it measure how long, on average, it took the business to collect from it’s trade debtors, but it may also be a good indicator of the quality and collectability of the debtors. Generally, the longer that debts are outstanding the more likely they are to be irrecoverable. The banker will be particularly interested in the trend from accounting period to period and, if possible, a comparison with industry norms. A lengthening of debtor collection days may indicate poor administration, individual debtors having cash flow problems, or over reliance on an individual customer who is able to dictate payment terms.

Inventory Turnover Days represents money tied up in stock. Again the banker will, if possible, examine trends and make comparison with industry norms. A lengthening of inventory turnover days may indicate an increase in obsolete or damaged inventory which may ultimately be unsellable, a change in the mix of inventory held, production inefficiencies (a manufacturing firm), or my be for quite innocent reasons (e.g. once off effect such as a special order).