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Content: The customer must then pay the invoice within the payment terms, usually within 30 days. Working Capital Management
Working capital (WC) represents the operating liquidity of a business. Net working capital is the difference between current assets and current liabilities. It is important for companies to have a healthy, positive networking capital. This is achieved through, among other techniques, astute management of accounts payables and receivables. Accounts receivables are analyzed by the average number of days to collect payment (called Days Sales Outstanding or DSO), and accounts payable are analyzed by the average number of days it takes to pay an invoice (Days Payable Outstanding or DPO). where COGS is cost of goods sold and COGS/day is the daily average of purchases. DSO of less than 45 days is generally considered healthy. Working capital can be increased by reducing the DSO or increasing the DPO i.e. collecting payment from customers quicker and delaying payment to vendors. However, there is always a business trade-off because delaying payment to vendors could tarnish the company's reputation and could also result in missing out on early payment discounts.