Which expression correctly represents the working capital cycle?

Which expression correctly represents the working capital cycle?

• A. Inventory days + receivable days - payable days
• B. Receivable days + payable days - inventory days
• C. Inventory days - payable days + receivable days
• D. Payable days + inventory days - receivable days

Answer: (D)

The working capital cycle is about how long funds are tied up as you move from financing inventory to getting cash from customers. If you view the cycle from the moment you pay suppliers, the factors that determine its length are: how long inventory sits before it’s sold, how long you hold onto cash by delaying supplier payments, and how long customers take to pay. In that framing, the total duration of the cycle is the sum of inventory days and payable days, minus the days it takes to collect from customers. So, the cycle equals inventory days plus payable days minus receivable days. For example, if inventory sits for 60 days, you can defer supplier payments for 30 days, and receivables take 45 days to collect, the cycle length would be 30 + 60 − 45 = 45 days. This shows why the chosen expression fits the supplier-to-customer financing view of the working capital cycle. Keep in mind that different texts may adopt alternative formulations, so it’s always good to use the convention specified in your course.

The working capital cycle is about how long funds are tied up as you move from financing inventory to getting cash from customers. If you view the cycle from the moment you pay suppliers, the factors that determine its length are: how long inventory sits before it’s sold, how long you hold onto cash by delaying supplier payments, and how long customers take to pay. In that framing, the total duration of the cycle is the sum of inventory days and payable days, minus the days it takes to collect from customers. So, the cycle equals inventory days plus payable days minus receivable days.

For example, if inventory sits for 60 days, you can defer supplier payments for 30 days, and receivables take 45 days to collect, the cycle length would be 30 + 60 − 45 = 45 days. This shows why the chosen expression fits the supplier-to-customer financing view of the working capital cycle. Keep in mind that different texts may adopt alternative formulations, so it’s always good to use the convention specified in your course.