Managing Working Capital Essay

Submitted By MichaelCHall

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DAYS SALES OF INVENTORY-gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower (shorter) the DSI the better, but it is important to note that the average DSI varies from one industry to another. -is a way to measure the average amount of time that it takes for a company to convert its inventory into sales. A relatively small number of days' sales in inventory indicates that a company is more efficient at selling off its inventory, while a large number indicates that a company may have invested too much in inventory, and may even have obsolete inventory on hand. However, a large number may also mean that management has decided to maintain high inventory levels in order to achieve high order fulfillment rates.
DAYS SALES OUTSTANDING-A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. -Due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again - ideally, to reinvest and make more sales. The DSO can be used to determine whether a company is trying to disguise weak sales, or is generally being ineffective at bringing money in. For most

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