Working Capital Cycle

The Working Capital Cycle explains how cash flows through a business during its normal operations. It shows the journey of money from purchasing raw materials, converting them into finished goods, selling the goods, and finally collecting cash from customers.

A typical working capital cycle includes:

• Inventory Period: Time taken to sell inventory
• Receivables Period: Time taken to collect payments from customers
• Payables Period: Time allowed by suppliers to make payments

The formula is often expressed as:
Working Capital Cycle = Inventory Days + Receivables Days − Payables Days

A shorter working capital cycle indicates efficient cash management and better liquidity. A longer cycle may lead to cash flow problems and higher borrowing needs. Businesses aim to reduce the cycle by faster inventory turnover, quicker collections, and better credit terms with suppliers.

"<p>If a company takes 40 days to sell inventory, 30 days to collect payment from customers, and gets 20 days&rsquo; credit from suppliers, its working capital cycle will be:<br /> <strong >40 + 30 &minus; 20 = 50 days</strong></p> <p >This means cash invested in operations is recovered after 50 days.</p>"