Working Capital Cycle

Last Updated: Jun 7, 2019

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Working Capital Cycle (WCC) - is the amount of time it takes to turn the net current assets and current liabilities into cash.

The longer the cycle is, the longer a business is tying up capital in its working capital without earning a return on it. Therefore, companies strive to reduce its working capital cycle by collecting receivables quicker or sometimes stretching accounts payable.

A positive working capital cycle balances incoming and outgoing payments to minimize net working capital and maximize free cash flow.

Growing businesses require cash, and being able to free up cash by shortening the working capital cycle is the most inexpensive way to grow. Sophisticated buyers review closely a target's working capital cycle because it provides them with an idea of the management's effectiveness at managing their balance sheet and generating free cash flow.

The WCC is made up of 4 core-components:

1) Cash & Cash Equivalent

2) Creditors/ Accounts Payable

3) Inventory/ Stock in hand

4) Debtors/ Accounts Receivables