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.
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As a business owner, I want to know how long it takes from the day I pay my supplier to the day the customers pay me so that I can work to free up cash and make investments to grow the company.
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).