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Lamies10
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Net Working Capital
How much money do we have tied up in our daily operations?
CA = Cash, AR, Inventory
CL = AP, Accrued Expenses
- LOWER is better unless you have a large rainy day cash fund. We don’t want too much tied up in our
- daily operations
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Working Capital to Sales
How effectively is the investment in working capital being used to generate sales?
LOWER is better.
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Working Capital Turnover
How efficiently is working capital being used to generate sales?
HIGHER is better
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Current Ratio
Do we have the right amount invested in working capital?
- We need it to be about 1:1. If it is much lower we may not be able
- to pay our liabilities as they become due. If it is much higher we may have too much invested in our
- day to day operations.
Close to 1:1
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Quick Ratio
- How much liquid assets do we have available to pay CL?
- Close to Current Ratio.
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Day's Supply of Inventory
How many days of inventory do we have on hand? How much cash is tied up in inventory?
LOWER is better
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Inventory Turnover
How many times did we sell our average inventory balance?
HIGHER is better.
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Day's Recievable Outstanding
How many days does it take us to collect from our customers?
LOWER is better
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Recievables Turnover
How many times did we sell and collect our average receivables balance?
HIGHER is better
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Bad Debt Percentage (Percent Uncollectible)
What percentage of our receivables will we not be able to collect? How reliable are our customers?
- Remember that Gross Receivables =
- Net Receivables + Allowance
LOWER is better.
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Days' Payables Outstanding
How long did we hold only our cash before we pay it out to our suppliers?
HIGHER is better.
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Accounts Recievable to Accounts Payable
How large is our receivables balance compared to our payables?
LOWER is better
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Cash Conversion Cycle
How many days does it take to turn an investment in WC into cash? Puts all three areas of our working capital (cash flow) management together.
LOWER is better
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