Definition
Working Capital Cycle
The working capital cycle is the time it takes a company to convert its investment in inventory and receivables back into cash, net of payables.
It combines inventory days and receivable days, less payable days, to give the cash conversion cycle. A shorter cycle means less cash tied up in operations, while a long cycle forces a company to fund operations with borrowing or its own capital.
Managing the working capital cycle is central to liquidity. Companies that stretch payables and collect receivables quickly free up cash, while those with bloated inventory and slow collections face working-capital stress, often funded by costly short-term bank credit.
Related terms
- Cash Conversion CycleThe cash conversion cycle measures how many days it takes a company to turn investments in inventory and receivables back into cash.
- Inventory Turnover RatioThe inventory turnover ratio measures how many times a company sells and replaces its inventory over a period, indicating how efficiently stock is managed.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.