How do you calculate working capital?

To calculate working capital, it is essential to understand the components involved: current assets and current liabilities. Working capital is typically determined by subtracting current liabilities from current assets.

The correct answer, which describes a formula employing financial metrics such as receivable days, inventory days, and payable days, aligns well with the concept of working capital management. Specifically, calculating working capital in this context involves assessing the efficiency of cash flow within a business.

The formula outlined—receivable days plus inventory days minus payable days—provides insight into the cash cycle of a business. Receivable days indicate the time it takes to collect receivables, inventory days reflect how long it takes to sell inventory, and payable days show how long the company can defer its obligations to suppliers. By analyzing these factors, businesses can obtain a clearer picture of their working capital position: it accounts for cash tied up in operations (the duration to convert inventory and receivables into cash) and the advantages afforded by extended supplier credit (the duration for which payables are outstanding).

Overall, this answer encapsulates the relationship between key operational metrics and working capital, making it a valid approach for assessing liquidity and financial health.