Rotation and average days

At a higher level, we analyze each element of working capital using the same methods. The overall objective is to know the average number of days that it takes for an item in stock to be sold, a customer to pay, or a supplier to be paid.

We can help free up cash for the business if we reduce the number of days that an item is in a warehouse or the number of days that a customer takes to pay an invoice. Inversely, we want to increase the number of days that we can wait to pay our suppliers without any penalty. Let's start our working capital analysis by calculating the average number of days that an item is in a warehouse. We call this key performance indicator Days Sales of Inventory (DSI).

Days Sales of Inventory

If we store inventory for too long, then it takes up space that could be put to better use or sold. If we store inventory for too few days, then we increase the risk of not being able to satisfy customers' needs. Days Sales of Inventory (DSI) tells us the...