Working Capital Cycle is period of time in order for current net assets, along with the inclusion of current liabilities, to turn over to actual cash.
Perhaps you have been hearing a lot about the working capital cycle or perhaps you have been hearing the term WWC used in many discussions in the business world as well. This then may lead you to wonder more about these issues, which is why this article will be highly beneficial in providing the clarity that you seek concerning these terms.
Before we get to the defining of those terms, it is a good idea to look at the term working capital in order to provide more clarity concerning the terms of working capital cycle or WCC. Thus, it is understood that the working capital is the measurement of assets at the present time with the subtraction of the liabilities at the present time, which affect the balance sheet of the company. When there is careful diligence applied to surveying a transaction, there is the analysis of the history of the working capital each month for the span of two to three years for the sake of being able to gain a clear comprehension regarding the true amount of funds that the business requires in order to have enough support for operational costs.
Working Capital Cycle Formula :
Working Capital Cycle = Inventory days + Receivable days – Payable days
(In reports we can read this term as wc cycle. )
When you hear reference being made in regard to the working capital cycle, this refers to the requirement of the period of time in order for current net assets, along with the inclusion of current liabilities, to turn over to actual cash. The longer this process takes, this means that the company is engaging in the investing of its capital in other parts of the business without the business being able to earn profits on the designated capital. As a result, most companies tend to assay to collect receivables as quickly as possible in order to produce a reduction in the length of the working capital cycle. Another way that companies also do this is by taking a longer time to deal with issues pertaining to accounts payable.
Therefore, it is understood that a working capital cycle that is positive in essence seeks to bring balance to payments that are both incoming and outgoing in order to cause a minimization to the net working capital. This is also done in order to ensure the maximization of the free cash flow. Take into consideration, for example, that a company that engages in providing payments to all suppliers within thirty days and yet engages in collecting receivables up to sixty days is maintaining a working capital of thirty days. When this is the case, this cycle of thirty days typically must be backed by funds via an operational line at a designated bank. With this being the case, the interest pertaining to this type of financial funding carries a weighty price that negatively impacts the profits of the company. Companies that want to see growth do have a need of cash. Understandably, the most cost effective way to grow a business is to seek to ensure access to cash via the reduction of the length of the working capital cycle. Byers that are highly sophisticated are careful to conduct a review of the working capital cycle in regard to a target due to the fact that this grants insight into the effectiveness of those in management concerning the managing of the balance sheet as well as the generation of cash flow that is readily accessible.