What is the working capital cycle?

What is the working capital cycle?

• A. The length of time between cash leaving and returning to the business
• B. The time to convert inventory to cash only
• C. The time to pay suppliers after receipt of goods
• D. The time to collect taxes

Answer: (A)

The working capital cycle shows how long cash is tied up in a business’s operations, from the moment cash leaves to pay for inputs to the moment cash is received again from customers. It captures the full loop: how long inventory takes to be sold, how long customers take to pay, and how long the business can delay payments to suppliers. In practice it’s the period between cash outflow and cash inflow, often expressed as days: days inventory outstanding plus days sales outstanding minus days payable outstanding. The aim is to shorten this cycle to free up cash for other uses. It isn’t just about converting inventory to cash, nor is it only about paying suppliers, and it doesn’t relate to collecting taxes, so those options don’t describe the complete cycle.

The working capital cycle shows how long cash is tied up in a business’s operations, from the moment cash leaves to pay for inputs to the moment cash is received again from customers. It captures the full loop: how long inventory takes to be sold, how long customers take to pay, and how long the business can delay payments to suppliers. In practice it’s the period between cash outflow and cash inflow, often expressed as days: days inventory outstanding plus days sales outstanding minus days payable outstanding. The aim is to shorten this cycle to free up cash for other uses.

It isn’t just about converting inventory to cash, nor is it only about paying suppliers, and it doesn’t relate to collecting taxes, so those options don’t describe the complete cycle.