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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!

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