Receivables and Inventory: The Working-Capital Signals
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In short
Receivables are sales the company has recorded and not yet been paid for. Inventory is money spent on goods not yet sold.
Canonical data and convention. Figures tie to Wexford Instruments (USD millions). Days measures use closing balances, per the Pillar 24 hub convention.
Both are assets, both are necessary, and both are cash the business has put out and not got back — which is why they are the two lines where growth quietly consumes money, and why they carry more information about how a business is actually running than almost anything else on the balance sheet.
Reading them in days rather than dollars
The absolute balances are almost uninterpretable, because they scale with the business. Converting them to days fixes that. Days sales outstanding — receivables divided by revenue, times 365 — is roughly how long customers take to pay. Days inventory — inventory divided by cost of goods sold, times 365 — is roughly how long goods sit before selling. Each is measured against the flow it relates to, which is why receivables go against revenue and inventory against cost of goods sold: inventory is carried at cost, so measuring it against revenue would mix two bases and produce a figure that moves whenever margins move.
The test that matters is comparative growth. If receivables grow faster than revenue, days are rising and the company is financing its customers more heavily than before. If inventory grows faster than cost of goods sold, goods are moving more slowly. Neither is a verdict — both have ordinary explanations — but both are questions, and they are questions the raw balances hide.
What moves them, innocently
Receivables rise for reasons that are usually mundane: a shift toward larger customers who negotiate longer terms, expansion into markets where slower payment is standard, a seasonal concentration of sales late in the period, or a deliberate decision to offer credit to win business. Inventory rises for equally ordinary reasons: building stock ahead of a launch or a busy season, lengthening supply chains, deliberate buffering against disruption, or a widening product range requiring more lines to be held.
Two structural points. First, growing companies consume working capital by construction — larger sales require larger receivables and larger inventory, funded before the growth pays for itself, which is why fast growth and tight cash coexist in perfectly healthy businesses. Second, these balances are net of estimates: receivables are shown after an allowance for amounts not expected to be collected, and inventory after write-downs to realisable value. Those allowances are judgements, which is why the earnings-quality article treats these lines as questions rather than facts.
Worked example
Worked example: two lines moving in opposite directions (canonical figures, USD millions). Receivables. Wexford's grew from 128.0 to 150.0 — up 17.2% — while revenue grew 13.6%. Because receivables outpaced sales, days sales outstanding rose from 53.1 to 54.8: customers are taking about a day and a half longer to pay than a year ago. Worth sizing — had days held at 53.1, receivables would be 145.5, so roughly 4.5 of extra cash is tied up in the drift. Inventory. It grew from 118.0 to 130.0 — up 10.2% — while cost of goods sold grew 10.9%. Inventory grew more slowly than the cost of what was sold, so days inventory improved slightly, from 79.6 to 79.1. The point. Two working-capital lines at the same company moved in opposite directions in the same year, and the combined figure conceals both movements entirely. Together they consumed 34.0 of cash — receivables 22.0 and inventory 12.0 — partly offset by 20.0 financed by suppliers and customers through payables and deferred revenue, for the net drain of 14.0 in the cash-flow reconciliation. And the scale. Receivables and inventory together are 280.0 — 27.4% of Wexford's total assets: more than a quarter of the balance sheet sitting in money advanced to customers and goods not yet sold. (Canonical figures; independently verified.)
Frequently asked
8 questions
What is days sales outstanding?
Receivables divided by revenue, times 365 — roughly how long customers take to pay. It converts a balance that scales with the business into a figure comparable across years.
Why is inventory measured against COGS rather than revenue?
Because inventory is carried at cost. Measuring it against revenue would mix a cost figure with a selling-price figure and produce a number that moves whenever margins move.
What does it mean if receivables grow faster than revenue?
Days are rising, so the company is financing its customers more heavily than before. It's a question rather than a verdict — larger customers with longer terms, new markets, or late-period sales concentration all produce it — but it's a question the raw balance hides.
Is rising inventory bad?
Not necessarily. Building ahead of a launch or a season, lengthening supply chains, deliberate buffering, and a widening product range all raise it for sound reasons. What's worth watching is whether it's growing faster than the cost of what's being sold.
Why do growing companies run short of cash?
Because growth consumes working capital by construction — larger sales need larger receivables and inventory, funded before the growth pays for itself. Fast growth and tight cash coexist routinely in healthy businesses.
Are these balances exact?
No — receivables are shown after an allowance for amounts not expected to be collected, and inventory after write-downs to realisable value. Both allowances are judgements, which is why these lines are read as questions rather than facts.
How much cash does a small change in days tie up?
Less than intuition suggests for small moves, and it compounds. On the illustration here, receivables days rising 1.7 days ties up about 4.5 of extra cash — modest against a 14.0 total working-capital drain, but it's a drift that continues if the trend does.
Can these two lines tell different stories at once?
Routinely. On the illustration, receivables days lengthened while inventory days improved slightly in the same year at the same company — and the combined working-capital figure conceals both movements.
References
Educational and informational only — not investment advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the possible loss of principal. Worked examples use fictional companies and figures.