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Critical Numbers – The Working Capital Cycle

Posted 6 months ago in BUSINESS PLANNING

The number of days your cash is tied up to take your goods and services through the sales process is referred to as the working capital cycle.  The longer the cycle the more cash you will have tied up and the greater the risk to your business.  Profitable businesses can go broke simply because they don’t manage this cycle and run out of cash.

Here’s the formula:

Stock (and/or Work in Progress days) + Debtor Days – Credit days (provided by suppliers)

For example:

Stock Days*                      45

+ Debtor Days^                60

– Credit days                   (30)

Working Capital Cycle    75

* Stock or work in progress days can be calculated as stock (or work in progress) / annual sales x 365

^ Debtor days can be calculated as Current debtor balance owing / annual sales x 365

Assuming daily sales in the above example are $5,000, the business will need either cash on hand or access to a line of credit of $375,000 to stay afloat.

How to shorten the working capital cycle:

  1. Reduce stock holdings – get rid of obsolete, slow-moving or dead stock, hold stock on consignment or reduce ordering levels
  2. Invoice more often – shift to weekly invoicing as opposed to monthly, do interim invoices or take deposits
  3. Change your payment terms – 7 days vs 20th of month following invoice date
  4. Use a debt collector or credit controller
  5. Negotiate more favourable terms with suppliers
  6. Ask us for 5 more ideas!!






‘Making more money will not solve your problems if cash flow management is your problem’ – Robert Kiyosaki

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