The inventory turnover days can be efficiently managed by increasing operational efficiency. This is the main component of the working capital cycle that a company can directly control. The company may not be able to replace the suppliers quickly Inventory Turnover Days.The suppliers may compromise on the raw material quality.The extended payable period may result in higher raw material prices.The higher the payable days average for the company, the shorter the working capital cycle. The company should work with reputable suppliers and agree on terms with extended accounts payable days. The working capital cycle starts with accounts payable days to the suppliers. As three main components make the cycle, all three can contribute to shortening the working capital cycle. How to Shorten Working Capital Cycle?Ĭompanies would naturally favor a shorter or even negative working capital cycle. A wholesale distribution company having no work in progress will have to match the industry standards of the short cycle though. A manufacturing company with long inventory turnover days and large receivable days can afford to keep a longer working capital cycle. The true nature and standard of it will vary from the industry and nature of the company business. The company can cover the shortage of cash with short-term financing options, especially for SME. What is a good working capital cycle figure?Īpparently, 15 days of the working capital cycle seems an acceptable figure. It means if the company operates with a positive value, it is losing on cash. In our example, the company will have to 15 days after selling the finished goods before they receive the cash. In the context of the working capital cycle, three components for calculation play an equally important part in achieving effective results.Ī positive working capital cycle as in our example means the company requires more days to receive the cash than to pay. Is a positive working capital cycle good for the company? How do we interpret it? Interpretation and Analysis Working Capital Cycle = 25 + 90 – 100 = 15 Days. Receivable Days Achieved = 90 Days (average) Payable days allowed = 100 Days (average) Let us consider the working cycle input component days as: READ: Overcapitalization – Definition, Indicators, and Solutions The finished products (Garments) are then sold to the wholesale distributors on credit. It transports the raw material from the supplier to its storage and factory. purchases raw material for garments manufacturing from its suppliers. For small companies or distributors, the inventory turnover can include only finished goods and holding days only. For large companies, the three sub-categories can add up to make the final inventory turnover days. The inventory turnover can also be divided into raw material, work in progress, and finished goods. Working Capital Cycle = Inventory turnover Days + Accounts Receivable Days – Accounts Payable Days Although these three main components of working capital can further be divided into subcategories, the broader extent of the working capital remains the same. The working capital cycle involves three main items of inventory, receivables, and payables. How to Calculate the Working Capital Cycle? It involves raw material purchases from suppliers, work in progress, finished goods, sales, and amounts receivables. Practically, the cycle is not that simpler. In other words, the time required to convert raw materials into goods and cash through sales. “The number of days or time a company takes to turn its current liabilities into current assets”. In relation to operational efficiency, we can define the working capital cycle as: In a sense, working capital management directly relates to the operational efficiency of the company. What is Working Capital Cycle?Ĭurrent assets and liabilities are related to the operational activities of the company. Current assets are more liquid than fixed assets, so a higher working capital equates favorable liquidity for the company. The term working capital also means the difference between the current assets and current liabilities of the company. Working capital is the measure of a company’s short-term financial health and liquidity.
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