Working capital cycle, Finance Basics

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Working Capital Cycle

The Concept of Working Capital/Cash Operating Cycle

Working capital cycle refers to period such elapses between the payment for raw materials bought on credit like cash outflows and the receipts of cash from ended goods sold upon credit as cash inflows.

The functioning capital cycle will includes the given like:

  1. Purchase of raw materials on credit from suppliers
  2. Payment of raw materials after the lapse of credit duration
  3. Conversion of raw materials into finished goods
  4. Sale of finished goods to creditors
  5. Receipt of cash from debtors.

This can be demonstrated using a diagram as given as:  

1829_working capital cycle.png

Working capital cycle = Stock conversion + debtors collection - Creditors payment

From the diagram the working capital cycle of duration will be determined as givens:

Stock conversion period + Debtors collection period - Creditors payment period


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