How Working Capital Cycle Impacts Your Business.pdf

A working capital cycle is a business cycle that describes the flow of money in a business, from its suppliers to its customers. It's also often known as the "cash flow".

1. HOW WORKING CAPITAL
CYCLE IMPACTS YOUR
BUSINESS
A working capital cycle is a business cycle that describes the
flow of money in a business, from its suppliers to its customers.
It's also often known as the "cash flow".

2. INTRODUCTION
Running a business often seems like juggling multiple
responsibilities at a time. You need to pay the due to your
suppliers who will produce the goods for you, and then
you need to generate the cash by selling the finished
goods to the market, and this process will repeat. You
must have sufficient working capital to run a business
smoothly. An insufficient amount of working capital will
make it difficult for companies to manage their daily
business expenses. This article will discuss the working
capital cycle and how you can calculate your working
capital with the working capital cycle formula. Additionally,
you will also learn about tips to improve your working
capital cycle and grow your business.

3. WHAT IS WORKING
CAPITAL?
Working capital is the money a company needs to run its
day-to-day operations. It consists of two parts: cash
available for immediate use and accounts receivable from
customers who have placed orders but haven’t yet paid for
them. Working capital also considers how much inventory
a company can afford to carry; if you have excess
inventory, it would take your storage and cost you money
without earning anything back.

4. WHAT IS WORKING
CAPITAL CYCLE?
A working capital cycle is a business cycle that describes the flow of
money in a business, from its suppliers to its customers. It’s also often
known as the “cash flow.” The cash flow refers to the money inflow to
cover your bills and expenses. It helps you understand how much
money you need at any given time and helps you plan for periods
when less revenue is coming in than usual.

5. OPERATING CYCLE OF
WORKING CAPITAL
The operating cycle of working capital means the time
required to convert raw materials into finished products
and services. It includes all the steps in the production
process: buying raw materials, processing them, selling
finished goods, and collecting payment for them.
The length of this cycle depends on many factors,
including how quickly you can process your inventory from
one stage to another, how long you keep your inventory on
hand before selling it, and how fast customers pay their
bills.

6. FOUR PHASES
OF WORKING
CAPITAL CYCLE
Here are four phases of the working capital cycle:
Cash Management:- Cash management is a key part of
running a business. The amount of money you have on
hand is what helps you pay your bills, and it’s also what
ensures that you have enough to manage your
business expenses.
Receivables:- Receivables are the payments you own
for goods and services. They are the money you
expect to receive from the people or companies that
owe you money but have not yet paid.
Inventory:- The time it takes to sell your inventory.
Payables:- Your payables to your suppliers or vendors.

7. WHAT IS WORKING
CAPITAL CYCLE
FORMULA?
To calculate the working capital cycle subtract the number
of days the company takes to pay its suppliers from the
number of days the company takes to collect the payment
from customers.

8. THE FORMULA IS: WORKING CAPITAL CYCLE = (DAYS INVENTORY OUTSTANDING +
DAYS SALES OUTSTANDING) – DAYS PAYABLE OUTSTANDING
This number represents the amount of time a company’s resources are tied up in its day-to-day operations. A shorter cycle means more
efficient use of resources.
The working capital cycle formula differs from business to business as a manufacturing industry has more phases than a retailer.
Let’s take an example of a manufacturing company; Redwood Ltd. procures raw plastics from Plastic Ltd. and then sells the finished good to
retail outlets. The manufacturer procures the material on credit, and it takes 45 days to sell the finished goods to clients. Clients do not pay
the money upfront but take 15 days to pay the money; manufacturers need to pay the money to suppliers as per credit terms in 30 days. So,
according to the working capital cycle formula
45 (INVENTORY DAYS)+ 15 (RECEIVABLE DAYS)- 30 (PAYABLE DAYS)= 30 DAYS
WORKING CAPITAL CYCLE.
POSITIVE VS. NEGATIVE WORKING CAPITAL CYCLE
The positive working capital cycle refers to a situation in which the company has more positive cash flow than it has negative
cash flow. It is normal and common to most businesses. It means the company is waiting to receive payment from clients to
create available cash.
On the contrary, in a negative working capital cycle, you have enough money to pay your credits before the due date. It refers to
a situation in which the company has more negative cash flow than it has positive cash flow.

9. SHORTEN THE OPERATING CYCLE OF WORKING CAPITAL TO IMPROVE BUSINESS
A shorter working capital cycle is beneficial to your business. It enables you to utilize your cash to improve business which could otherwise be
stuck in the cycle. The capital remains locked if the operational cycle is long; hence it’s important to have sufficient capital to sustain business
operations.

10. HOW TO SHORTEN THE OPERATING
CYCLE OF WORKING CAPITAL?
You can shorten your working capital cycle in numerous ways:
Handle Inventory Smartly: Buy in-demand stock at a good price, and don’t buy bulk stocks. Calculate the number
of days it takes for your inventory to sell off. If it takes 60 or more days, you need to work on your sales strategies
to reduce your inventory time.
Collect Payments Early: Try to collect money early than the due date by incentivizing customers who pay early
and chasing those who pay late.
Pay Bill on Time: To maintain a good credit score, you should pay your suppliers on time but avoid paying too
early.
WHAT CAN AFFECT THE WORKING CAPITAL CYCLE
Cash flow is the most important factor in a working capital cycle. It is because cash flow determines the
length of time an organization needs to finance its operations, affecting how often it can pay creditors.
Credit terms can also have an impact on working capital cycles. When you extend credit to your customers,
they will be able to buy more from you than if they had to pay for their purchases upfront. The extra money you
get from selling on credit will increase your cash balance and reduce your need for financing at any one time
—allowing other organizations less access to those funds.
Inventory financing involves selling goods before they are produced or delivered so that a company will have
enough money available when orders come through later.

11. HOW TO IMPROVE YOUR
WORKING CAPITAL CYCLE?
Steps you can consider to improve your working capital cycle:
Shorten Operating Cycle: Shorten your operating cycle to increase cash flow, generating working capital. Reduce credit terms
and billing, and ask for upfront payment or deposits to shorten the operating cycle.
Never Finance Fixed Asset with Working Capital: Fixed assets are used for long-term use. These are building, equipment,
vehicles, machines, land, etc. Selling a fixed asset can generate enough cash flow. Still, it’s not wise to finance a fixed asset with
working capital because fixed assets are expensive, and paying for them might deplete working capital and increase the risk to
the business.
Reduce Unnecessarily Expenses: Carefully analyze variable business expenses to reduce unnecessary costs. It could allow you
to save more and divert your fund for business expansion and operational improvement.
Find Additional Bank Finance: You may visit the bank for low-interest rate loans for working capital. Maintaining a good credit
score may help you get low-interest loans quickly from a financial institution. Get Vendor Finance from Mynd Fintech with flexible
repayment terms of up to 120 days of an invoice.
Reduce Bad Debt: Bad debts are a threat to a business, reduce bad debts or uncollectible receivables to maintain your working
capital. You could reduce your bad debt by increasing margins on your goods and services.

12. CONCLUSION
Without a good cash flow, your company will likely have
very limited opportunities for growth. The working capital
cycle illustrates that most businesses rely on an
interrelated system of debt and credit. Taking insights from
this will help you run your business more smoothly and
cope more easily with the challenges in your business life.
Despite putting in your best efforts, working capital may
get affected due to unavoidable circumstances such as
delayed payments from clients or suppliers. Maximize your
cash flow and grow your business with Mynd Fintech.

13. THANK YOU
Phone
Website
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myndfin.com