Working capital cycle formula?

Working capital cycle formula?

• A. Inventory holding days + receivable collection period - payable days
• B. Inventory holding days - receivable collection period + payable days
• C. Receivable collection period + payable days
• D. Inventory holding days + payable days - receivable days

Answer: (A)

The working capital cycle shows how long cash is tied up in the operating cycle, from paying for inventory to receiving cash from customers, with the ability to stretch payments to suppliers reducing the cycle. It is calculated as the inventory holding period plus the receivable collection period minus the payable deferral period. Inventory holding days reflect how long stock sits before sale, and receivable collection period reflects how long customers take to pay. Payable days represent how long you can delay paying suppliers without penalties. Since inventory and receivables keep cash out of the business for longer, they add to the cycle. Payables, by contrast, let you delay outflows, so they reduce the cycle. Therefore, the net time is inventory days + receivable days − payable days. Alternatives that treat the payable period as an addition or that omit one of the components don’t accurately capture the cash conversion timing, which is why the plus on inventory and receivable with a minus on payable is the correct arrangement.

The working capital cycle shows how long cash is tied up in the operating cycle, from paying for inventory to receiving cash from customers, with the ability to stretch payments to suppliers reducing the cycle. It is calculated as the inventory holding period plus the receivable collection period minus the payable deferral period.

Inventory holding days reflect how long stock sits before sale, and receivable collection period reflects how long customers take to pay. Payable days represent how long you can delay paying suppliers without penalties. Since inventory and receivables keep cash out of the business for longer, they add to the cycle. Payables, by contrast, let you delay outflows, so they reduce the cycle. Therefore, the net time is inventory days + receivable days − payable days.

Alternatives that treat the payable period as an addition or that omit one of the components don’t accurately capture the cash conversion timing, which is why the plus on inventory and receivable with a minus on payable is the correct arrangement.