Working Capital and Cash Flow
Q: Would it be a good idea to measure cash flow cycle days and % increase in sales /expenses to better determine where working capital went/came from?
A: Yes, doing so can be helpful. For example, an increase in the duration of the cash flow cycle – or financing gap – points to a more rapid buildup in working assets (accounts receivable and inventory) compared to a slower increase in operating liabilities (accounts payable and accrued liabilities). Such a pattern will increase working capital but, not surprisingly, will reduce cash flow at the same time.
You might also measure the increase in EBITDA% or the net profit margin along with increased sales since any increase in profit and associated net income + depreciation (traditional “cash flow”) increases working capital...and vice versa.
In referencing an analysis of the cash flow cycle days and changes in sales activity, you have also touched on the key factors affecting the cash flow of the borrower. Using the same implications as used in considering their impact on working capital, the dynamics also drive cash flow performance. There is much we can gain from a dual-purpose analysis of the same data.
Course overview: Working Capital and Cash Flow