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Identify the three clocks
Inventory days relate inventory to a cost-of-sales flow. Receivable days relate receivables to a selected sales flow. Payable days relate trade payables to a purchases flow. The balance averages and flow period need to match.
Keep each denominator visible
| Component | Average balance | Period flow |
|---|---|---|
| Inventory days | Inventory | COGS |
| Receivable days | Trade receivables | Stated sales base |
| Payable days | Trade payables | Stated purchases base |
Label a proxy when the preferred input is unavailable
Total revenue may be used for receivables turnover under a particular reference convention, while credit sales can be informative for credit receivables when available. COGS is sometimes used as a proxy for purchases. A proxy calculation should be labelled so it is not silently compared with another basis.
Separate an estimated ratio from an invoice schedule
The days ratios summarize balances and flows across the chosen period. They are not a record of the exact purchase, collection and payment dates for every transaction. A short or negative calculated cycle does not certify that every payment can be met.
Investigate the components and business context
Changes can reflect volumes, terms, seasonality or measurement differences as well as operational performance. Inspect the component amounts and definitions before describing a shorter cycle as automatically better.