Days working capital is used as a performance indicator to gauge the efficiency of management in terms of its short-term liquidity position. Days working capital describes the ratio of working capital to sales or revenue. It expresses the number of days a company takes to convert its working capital to revenue (Boisjoly, Conine Jr, & McDonald IV, 2020). Working capital is a financial metric used to measure a company’s liquidity and overall health since it describes the funds available for day-to-day operations. It is calculated as the difference between current assets such as accounts receivable and inventory and current liabilities such as accounts payable. The formula for calculating days working capital;
Days working capital= Total current asset- total current liabilities * 365 days
Annual sales revenue
Apple Incorporated days of working capital as per 2020 financial statements;
Days of working capital= 140,065,000- 95,318,000 *365 = 273
Apple Inc. takes 273 days to convert the investment in working capital into sales, which is 273 days to achieve sales equal to $ 59,685,000. Apple Inc.’s main competitors include Microsoft corporation and Huawei Technologies Company Limited. Microsoft Corporation’s days of working capital as per 2020 financials was 279 while Huawei Technologies Company Limited was 122.
Importance of Comparison of Day Working Capital to Competitors
Investors use days’ working capital as a valuable tool when appraising a business. It indicates whether the company has enough funds to pay for its expenses and purchase inventory and pay the short-term debt. The comparison of days’ working capital is also used to determine the viability of the business. Businesses aim to shorten the days working capital to improve their short-term liquidity position and improve efficiency.
An effective company requires fewer days to convert the working capital into revenue. A firm that requires fewer days to convert the corking capital to revenue has reduced the need for external financing since it uses its working capital more efficiently and can free up cash in working capital quicker (Pakdel & Ashrafi, 2019). A less efficient company takes more days to generate the same amount of revenue. An increase in sales influences a decrease in days working capital. The days working capital is high, sales are decreasing, or the company is taking longer to collect payment for its payables. A company should minimize the figure as little as possible to achieve more sales with working capital. For example, where the days of working capital is 1, with the same amount of working capital of 44,747,000, Apple’s sales would be equal to the investments of $ 44,747,000. This leads to more earnings before interest and tax due to an increase in sales. The interest cost remains the same; thus, the earnings before interest and tax will increase due to savings on interest tariff (Gao & Wang, 2017). Comparison of days working capital for companies in the same industry indicates the efficiency of the companies since there is a standard level: the lesser a corporation’s days’ working capital, the more viable the business and vice versa.
Supply Chain Management
Companies aim at reducing days to working capital can be solved through practical supply chain management techniques. The techniques include increasing sales without increasing working capital or reducing working capital without reducing sales. Apple Inc. Can achieve a reduction in the days working capital by curating the supply chain using just in time and economic order quantity methods. The just-in-time method refers to purchasing goods when needed in manufacturing, and economic order quantity refers to ordering the optimal amount of inventory. These two methods reduce inventory and consequently current assets. In addition, Apple Inc should collect revenue from clients more efficiently by minimizing credit periods.
Boisjoly, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8.
Gao, J., & Wang, J. (2017). Is working capital information useful for financial analysts? Evidence from China. Emerging Markets Finance and Trade, 53(5), 1135-1151.
Pakdel, M., & Ashrafi, M. (2019). Relationship between Working Capital Management and the Performance of Firm in Different Business Cycles. Dutch Journal of Finance and Management, 3(1), em0057.