Operating Efficiency - Working Capital Ratios

Stuart Patch
Jan 15
2 min read

Updated: Feb 9

💠 Unlocking Financial Insights – ⚙️ Efficiency & Working Capital Ratios

Understanding financial results isn’t just about revenue and profit, it’s also about how effectively your business uses its resources day‑to‑day. Efficiency ratios shine a light on how well cash, inventory, and assets are being managed to support operational performance.

Following on from my post on Liquidity Ratios, this third instalment explores Efficiency & Working Capital Ratios, essential for understanding how quickly your business converts investment into cash flow.

https://www.youtube.com/watch?v=KmNkGH5-QXE

Below are five key ratios every leader should understand:

1️⃣ Days Sales Outstanding (DSO)

💎 Formula: (Trade Receivables ÷ Revenue) × 365

💡 Focus: Measures how quickly your business collects customer payments. A lower DSO means faster cash conversion and stronger cash flow discipline.

2️⃣ Days Inventory Outstanding (DIO)

💎 Formula: (Inventory ÷ Cost of Goods Sold) × 365

💡 Focus: Shows how long inventory sits before being sold. Useful for assessing stock efficiency, purchasing strategy, and potential cash tied up in slow‑moving items.

3️⃣ Days Payables Outstanding (DPO)

💎 Formula: (Trade Payables ÷ Cost of Goods Sold) × 365

💡 Focus: Indicates how long your business takes to pay suppliers. A higher DPO supports cash flow — but stretch it too far and supplier relationships may suffer.

4️⃣ Cash Conversion Cycle (CCC)

💎 Formula: DSO + DIO – DPO

💡 Focus: The ultimate working‑capital efficiency metric. It measures how many days are required to turn the business’s investments in inventory and receivables back into cash.

5️⃣ Asset Turnover

💎 Formula: Revenue ÷ Average Total Assets

💡 Focus: Evaluates how efficiently assets are used to generate revenue. Higher turnover means stronger utilisation and a more productive operating model.

❓ Why these ratios matter:

Efficiency ratios help leaders understand how effectively their business converts operations into cash. Strong working capital performance supports resilience, reduces financing needs, and provides capacity for growth or investment.

When monitored together, these ratios create a powerful picture of operational health, enabling better forecasting, improved cost management, and data‑driven decision‑making.

🎥 If you’d like to explore more detail on how these ratios are calculated and interpreted, take a look at the video below:

https://youtu.be/KmNkGH5-QXE

📖 If you would like to learn more about Ratio analysis and how it can help you drive performance in your business please have a look at the course below:

https://www.patchway.com.au/challenge-page/8c3bfd55-43b7-4665-8eed-75a41e850fa7?programId=8c3bfd55-43b7-4665-8eed-75a41e850fa7

❓ Which efficiency ratio do you consider most important in your organisation?