The working capital cycle (WCC) measures the time in days a company takes to convert its net working capital—current assets minus current liabilities—into cash, often termed the cash-to-cash cycle. A shorter cycle indicates faster cash turnover and better efficiency, while a long cycle ties up capital.
The FormulaWorking Capital Cycle = Inventory Holding Period + Trade Receivables Collection Period − Trade Payables Payment Period
- Inventory Holding Period (Days Inventory Outstanding or DIO): How long stock sits before being sold.
- Trade Receivables Collection Period (Days Sales Outstanding or DSO): How long it takes customers to pay.
- Trade Payables Payment Period (Days Payable Outstanding or DPO): How long the business takes to pay suppliers.
The payables period is subtracted because it represents "free" financing from suppliers.
ABC Co takes about 40 days on average to convert its operating investments back into cash. In other words, cash is tied up for 40 days between buying materials and receiving payment from customers (after accounting for supplier credit).
Why It MattersA 40-day cycle isn't unusually long, but businesses aim to shorten it by:
- Reducing excess inventory
- Speeding up customer payments (e.g., better credit terms or reminders)
- Negotiating longer payment terms with suppliers
