12.3 The working capital cycle

Question 1

What is the working capital cycle (WCC)?

Answer 1

The time taken by an organisation to convert its net current assets into cash.

Question 2

At what point does the working capital cycle end?

Answer 2

At the point at which the customer makes payment.

Question 3

What factors affect the length of the working capital cycle?

Answer 3

• the balance between liquidity and profitability
• efficiency of management
• terms of trade
• the nature of the industry

Question 4

How does the working capital cycle of a product provider (i.e. a manufacturer) differ to that of a service provider?

Answer 4

The manufacturer’s cycle has additional steps such as purchase of materials and work in progress of goods.

Question 5

What are the four main components of the working capital cycle?

Answer 5

1 Cash
2 Inventory
3 Receivables
4 Work in progress

Question 6

What is the inventory holding period?

Answer 6

The average number of days taken to process or sell inventory.

Question 7

What is the debtors collection period?

Answer 7

The average number of days taken to realise the payments of credit sales made by the entity.

Question 8

What is the creditors payment period?

Answer 8

The average number of days taken to make payment to trade creditors or suppliers.