From the course: Cash Flow Cycles and Analysis

Calculate receivable days, inventory days, and payable days

From the course: Cash Flow Cycles and Analysis

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Calculate receivable days, inventory days, and payable days

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- [Instructor] All right, let's start building our funding gap calculator. The first thing we need to do is make an assumption about the number of days in the period. This is an annual income statement that we've received from the client, so we can put 365 days in as the days in the period. The revenue, we will link to the income statement. The cost of goods sold will also link from the income statement. These are the two income statement items that are required. We need revenue because that's what accounts receivable connects to, and we need cost of goods sold because that's what inventory and accounts payable connect to. There's nothing else on the income statement we need. Then on the balance sheet, as you recall, in terms of our definition of working capital, we're focused on accounts receivable, inventory, and then accounts payable, which is the money that the company owes. So we've got those linked up. Now we can calculate, on average, the number of days it takes this company to receive payment. To calculate that, let's take the receivables, divide them by the revenue, and multiply them by the number of days in the period. This formula gives us, on average, the number of days it takes this company to receive payment for revenue. Let's do the same thing for inventory now. We'll take inventory, divide by cost of goods sold, and multiply by the number of days in the period. So we see that, on average, it takes 29.6 days for the company to turn its inventory. It takes 36.5 days to receive payment from revenue, and let's see how long it takes for the company to pay its bills. So we take the payables, assuming that all of the payables apply to cost of goods sold and nothing else on the income statement. That's our assumption for now. And then multiply that by the number of days in the period. So we see that it's 39.5 days. So now we've completed the first step of this model, which is to figure out how many days it takes to receive payment, how many days it takes for inventory to sell, and how many days it takes for accounts payable to be paid off.

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