Measures the amount of time each net input dollar is tied up in the buying, production, and sales process before it's converted into cash through sales to customers (DSO + DIO - DPO). The lower the number the better, a low number compared to peers within an industry indicates strong cash flow creation from internal operations.
DSO is a relative measure of a business' debtor exposure. It measures the level of outstanding sales/revenue at the end of a month expressed in terms of the number of days sales/revenue represented by the balance of the accounts receivables (i.e., the number of days worth of sales/revenue still outstanding). This measure is typically represented as a monthly trend and is important as the increase in the gap between DSO and BPDSO can be an early sign of deficiencies in the credit and collections process. When determining if the DSO of a company represents good performance, it should be compared to the company's BPDSO. BPDSO is important as a reference point against which to compare a company's DSO performance. A DSO of 92 may initially appear to be very high, but if the company's BPDSO is 88, then a DSO of 92 represents a good performance.
DPO is a relative measure of a business' outstanding payment liability. DPO measures the level of outstanding payments at the end of a month expressed in terms of the number of days payments represented by the creditor balance, i.e. the number of day's worth of payments still outstanding. The metric is useful as it gives an indicator over time of what payment terms are being accepted and complied with within a company.
DIO is a financial and operational measure, which expresses the value of inventory in days of cost of goods sold. It represents how much inventory an organisation has tied up across its supply chain or more simply - how long it takes to convert inventory into sales. This measure can be aggregated for all inventories or broken down into days of raw material, work in progress and finished goods. This measure is normally produced monthly.
The most commonly employed working capital metric, which assesses the overall operational liquidity of a business. Typically calculated as Current Assets (Accounts Receivable + Inventory) less Current Liabilities (Accounts Payable).
Net Working Capital as a % of Sales measures the relationship between working capital requirement and revenue, i.e., the percentage of working capital required to support further sales. For example, a measurement of 20% means that for every €100 of sales generated, €20 working capital will be required. Monitoring this metric can provide insight into working capital efficiency and requirements during periods of sales growth or decline.
SVA is a value-based performance measure of a company's worth to shareholders. The basic calculation is net operating profit after tax (NOPAT) minus the cost of capital from the issuance of debt and equity, based on the company's weighted average cost of capital. All working capital improvements help improve SVA.
ROCE is a ratio that indicates the efficiency and profitability of a company's capital investments. The measure is important as the ROCE ratio should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.