Financial analysis : Question 10
Is working capital counted in number of days sales excluding tax or including tax? Which figure is more relevant? Why?

Working capital is usually counted in number of days sales is what happens in practice, rather than an academic principle. The figure recorded under Sales on the income statement excludes tax, as does the figure under Inventories, while Trade receivables and Trade payables are inclusive of tax. As working capital does not treat VAT in a standardised way, the ratio between working capital and sales excluding VAT is not standardised either.

However, when calculating ratios for customer and supplier payment periods and inventories, it is possible to have a much more standardised practice.

For more information, see chapter 11 of the Vernimmen.