What is a negative Working Capital Cycle?Īs we saw in the retailer example above, it is possible to have a negative cycle if you’re able to collect money faster than the time you require to pay your bills. This is normal and the situation most businesses are in because they must balance paying suppliers with producing their product or service, and being paid. When a company is waiting to receive payment to create available cash, it has a positive Working Capital Cycle. Inventory Days (42) + Receivable Days (3) - Payable Days (60) = A Working Capital Cycle of minus 15 days What is a positive Working Capital Cycle?
They have 60 days to pay their supplier Maker Ltd (Payable Days), and when a sale is made, payment arrives into their account in three days (Receivable Days). Supplies Ltd buys furniture from Maker Ltd which they expect to sell in six weeks’ time (Inventory Days). The formula is simpler because a retailer doesn’t need to hold raw materials in stock and turn them into a product. Now let’s see what the Working Capital Cycle is like for a retailer. One way to do this would be to negotiate credit terms with its supplier. However, if Maker Ltd was able to extend the payable days, it would have a shorter Working Capital Cycle and therefore better cash flow. This means Maker Ltd will be out of pocket for an average of 64 days between paying its supplier, producing and shipping the product, and receiving cash into its bank account from customers.
The formula to calculate the Working Capital Cycle for this company is: Let’s calculate the Working Capital Cycle for a fictitious manufacturing company.
For example, a manufacturing business will have more phases than a retailer. The Working Capital Cycle formula may vary depending on different types of business. Inventory Days + Receivable Days - Payable Days = Working Capital Cycle in Days To calculate Working Capital Cycle, add the number of inventory days to your receivable days, then subtract the number of payable days.