Cleaner (Balance) Sheets: The 2009 Working Capital Scorecard

Randy Myers is a contributing editor of CFO.

How Working Capital Works

Days Sales Outstanding: AR/(total revenue/365)
Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by one day of average revenue.
A decrease in DSO represents an improvement, an increase a deterioration. In the accompanying charts, companies marked with an asterisk have securitized receivables, which improve DSO through financing alternatives without improving the underlying customer-to-cash processes such as credit-risk assessment, billing, collections, and dispute management. The scorecard eliminates this distortion by adding securitized receivables back on the balance sheet before calculating DSO.

Days Inventory Outstanding: Inventory/(total revenue/365)
Year-end inventory divided by one day of average revenue.
A decrease is an improvement, an increase a deterioration.

Days Payables Outstanding: AP/(total revenue/365)
Year-end trade payables divided by one day of average revenue.
An increase in DPO is an improvement, a decrease a deterioration. For purposes of the survey, payables exclude accrued expenses.

Days Working Capital: (AR + inventory - AP)/(total revenue/365)
Year-end net working capital (trade receivables plus inventory, minus AP) divided by one day of average revenue.
The lower the number of days, the better. The percentage change is marked N/M (not meaningful) if DWC moved from a positive to a negative number or vice versa.

Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO. Our methodology, however, uses net sales across the four working-capital categories to allow a balanced comparison.

This year's survey uses the Global Industry Classification Standard to categorize companies.

• « previous
• 1
• 2
• 3

LinkedIn Company Connections:

• Church & Dwight |
• Cliffs Natural Resources |
• REL |
• Atlas Air Worldwide Holdings