Measuring the working capital cycle
The working capital cycle measures the number of days required to convert net working capital into cash. Here is the working capital cycle for a manufacturer and a retailer:
Manufacturer example
The manufacturer—a furniture builder in this case—purchases raw materials, builds furniture, sells finished goods to customers, and collects payment in cash. The working capital cycle requires 45 days.
Retailer example
The retailer buys inventory, sells goods to customers, and collects payment in cash. The working capital cycle is completed in 30 days.
The number of days in the cycle depends on the industry and the complexity of the business. For example, an airplane manufacturer will have a longer cycle than a greeting card retailer because building a plane can take a year or longer.
Both online sales and items sold in a physical store must be converted into cash after the sale. A business with a shorter working capital cycle can operate using less cash than other businesses. If you can collect money faster, you can purchase inventory sooner and fund other needs.