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Working Capital Health Check and Benchmarking



Working Capital Health Check - BenchmarkWorking capital is the blood of any businesses, no matter what the size is. Therefore, performing a healthy check of your business is just like regularly checking of your own blood tension; diagnosing the symptoms will raise an initial clue, if you’re okay or not. To know whether your businesses are okay or not, you would need to perform a working capital health check. To be able to check your working capital health, you would need to understand how your working capital works. By understanding the metrics, you will be able to score it, finally you can compare your company’s score with the industry benchmark.

Through this post, I am going to share the four fundamental working capital metrics: (1) Days Sales Outstanding [DSO] (2) Days Inventory Outstanding [DIO] (3) Days Payable Outstanding [DPO], and (4) Days Working Capital [DWC]. I also post the 2009 working capital Benchmark that you may compare your working capital to. Follow on…




1. Days Sales Outstanding [DSO]

Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by one day of average revenue.

Formula: AR/ [total revenue/365]


Symptoms and Diagnose: 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.



2. Days Inventory Outstanding [DIO]

Year-end inventory divided by one day of average revenue.

Formula: Inventory x [total revenue/365]


Symptoms and Diagnose: A decrease is an improvement, an increase a deterioration.



3. Days Payables Outstanding [DPO]

Year-end trade payables divided by one day of average revenue.

Formula: AP/[total revenue/365]


Symptoms and Diagnose: An increase in DPO is an improvement, a decrease a deterioration.



4. Days Working Capital [DWC]

Year-end net working capital (trade receivables plus inventory, minus AP) divided by one day of average revenue.

Formula: [AR + inventory – AP] / [total revenue/365]


Symptoms and Diagnose: 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. However, by using net sales across the four working-capital categories, it allows a balanced comparison.



The 2009 Working Capital Benchmark

Scoring your DSO, DIO, DPO and DWC is just like knowing your blood pressure without knowing whether it is normal or abnormal. You would need to benchmark them, comparing your score with the industry average. Here I post “The 2009 Working Capital Benchmark” which is adapted from a survey reported by on their publication titled “The 2009 Working Capital Scorecard”, with simplification that I use the data “median” only. uses the Global Industry Classification Standard [GICS] to categorize companies.


1. Industry Category: Aerospace and Defense

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [59]       [53]     [27]       [85]                       
Sample [Companies]:
[-]. Spirit Aerosystem Holdings
[-]. Northrop Grumann


2. Industry Category: Airlines

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                              [9]         [6]         [15]       [0]
Sample [Companies]: 
[-]. US Airways Group                     
[-]. Continental Airlines



3. Industry Category: Auto Components

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [46]       [31]        [45]      [32]
Sample [Companies]: 
[-]. Goodyear Tire & Rubber                              
[-]. Federal Mogul



4. Industry Category: Biotechnology

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [58]       [35]        [12]      [81]
Sample [Companies]: 
[-]. Life Technologies                              
[-]. Celgene



5. Industry Category: Building Products

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [37]       [36]        [23]      [50]
Sample [Companies]: 
[-]. Quanex Building Product                              
[-]. Armstrong World Industries


6. Industry Category: Chemicals

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [47]       [44]        [27]      [65]
Sample [Companies]: 
[-]. Dow Chemical                              
[-]. Terra Industries



7. Industry Category: Communication Equipment

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [47]       [31]        [26]      [53]
Sample [Companies]: 
[-]. Palm                              
[-]. ADC Telecommunications



8. Industry Category: Computer Peripherals

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [52]       [22]        [40]      [34]
Sample [Companies]: 
[-]. Apple                              
[-]. Teradata



9. Industry Category: Containers and Packaging

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [38]       [43]        [31]      [50]
Sample [Companies]: 
[-]. Crown Holding                              
[-]. Sealed Air



10. Industry Category: Diversified Telecommunication Services

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [36]       [3]        [22]      [17]
Sample [Companies]: 
[-]. AT&T                              
[-]. Verizon Communications



11. Industry Category: Food Products
                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [25]       [39]        [29]      [35]
Sample [Companies]: 
[-]. Kellogs                             
[-]. Dean Foods



12. Industry Category: Healthcare Equipment, Supplies

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [59]       [50]        [19]      [89]
Sample [Companies]: 
[-]. West Pharmaceutical Svcs.                              
[-]. Invacare



13. Industry Category: Household Product

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [38]       [37]        [28]      [47]
Sample [Companies]: 
[-]. Procter & Gamble                           
[-]. Energizer Holdings


14. Industry Category: Industrial Conglomerates

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [46]       [44]        [29]      [61]
Sample [Companies]: 
[-]. McDermott Int’l                              
[-]. General Electric



15. Industry Category: Metals and Mining

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [24]       [44]        [19]      [48]
Sample [Companies]: 
[-]. Southern Copper                              
[-]. Century Aluminum



16. Industry Category: Multiline Retail

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [3]       [61]        [23]      [41]
Sample [Companies]: 
[-]. Nordstrom                             
[-]. Retail Ventures



17. Industry Category: Paper and Forest Product

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [28]       [43]        [22]      [49]
Sample [Companies]: 
[-]. Louisiana Pacific                              
[-]. Verso Paper


18. Industry Category:  Pharmaceuticals

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [56]       [35]        [21]      [70]
Sample [Companies]: 
[-]. Johnson & Johnson                              
[-]. Watson Pharmaceuticals



19. Industry Category: Software

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [74]       [0]        [11]      [63]
Sample [Companies]: 
[-]. Intuit                              
[-]. Parametric Technology


20. Industry Category: Specialty Retail

                                                        [DSO]   [DIO]   [DPO]   [DWC]

Median:                                             [4]       [52]        [24]      [32]
Sample [Companies]: 
[-]. Gamestop                             
[-]. Marinemax


Health check and benchmark your working capital now!



  1. stephane F

    Nov 21, 2010 at 10:16 am

    Hi, I guess there is a msitake in the DIO formula as does noit reflect its definition…it should be divided not multiplied. Thanks

  2. Nicole

    Jun 24, 2012 at 3:17 am

    Good observation.

    The DIO and DPO also are not using the standard CGS (Cost of Goods Sold) but instead are using revenue, making the DIO and DPO look much better than they are in reality and relative to standard statistics you’ll see elsewhere. (While Putra, the author of this current article notes that because the calculations are consistent across DIO, DSO and DPO, this alternate method (using revenue instead of CGS) is not a problem, you would be hard pressed to find comparative measures elsewhere. Furthermore, you could have two companies with the same actual days inventory, have different results here simply because one has a higher gross margin.)

    Also, the calculations should use average balance sheet numbers (inventory, receivables and payables, not year-end numbers) in the denominator. Using end of year period numbers is particularly bad in years of growth and downsizing. This is basic logic, although, I’m noticing on multiple Websites, an all too frequent error. You should use the average over the same period as the income statement period, usually annual or quarterly, by taking the end of last period’s inventory, for example, plus the end of this period’s divided by two. If you are doing these calculations internally and have more frequent data to calculate the average (e.g., monthly), you would get a more accurate number.

    Morningstar is a good source for finding statistics on specific companies. For example, here is Johnson & Johnson’s ( See Key Ratios, at the bottom of the page and under the Efficiency Ratios tab. You can use the financials tab to validate that the formulas indeed use the average of balance sheet numbers in the denominator and COGS for DIO and DPO.

    Lastly, the interpretation offered by the author is not always so clear in practice. For example, while reducing DOI is certainly most often good for cash management, it may not be for sales (i.e., availability of merchandise in retail or availability of raw material in manufacturing). Businesses must balance supply chain vs. sales considerations. While very high DOI for example, likely is not good in any respect, financial indicators such as these efficiency indicators are meant to be interpreted in light of the business model, over time and within industry. The CFO report cited here but for 2010 provides some insight into some of the drivers and other considerations for working capital management. However, I would ignore the formulas at the end. As mentioned above, they are not standard or accurate. (Here is the link

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