The working capital cycle is defined as which of the following?

The working capital cycle is defined as which of the following?

• A. Inventory Days + Receivables Days - Payables Days
• B. Payables Days - Inventory Days + Receivables Days
• C. Receivables Days - Payables Days
• D. Inventory Days - Receivables Days - Payables Days

Answer: (A)

It’s about the cash conversion cycle—the time between when you lay out cash to buy inventory and when you collect cash from customers, offset by how long you can defer payments to suppliers. The correct way to express this in days is: Inventory Days plus Receivables Days minus Payables Days. Inventory Days captures how long inventory sits before sale, Receivables Days captures how long it takes to collect from customers, and Payables Days credits the cycle by delaying payments to suppliers. Subtracting Payables Days reflects that using supplier credit shortens the time your own cash is tied up in the cycle. For example, if Inventory Days are 40, Receivables Days are 30, and Payables Days are 20, the cycle is 50 days, meaning cash is tied up for about 50 days on average. Other formulations omit the inventory component or mis-sign the effects of payables, so they don’t measure the actual duration of the operating cash cycle.

It’s about the cash conversion cycle—the time between when you lay out cash to buy inventory and when you collect cash from customers, offset by how long you can defer payments to suppliers. The correct way to express this in days is: Inventory Days plus Receivables Days minus Payables Days. Inventory Days captures how long inventory sits before sale, Receivables Days captures how long it takes to collect from customers, and Payables Days credits the cycle by delaying payments to suppliers. Subtracting Payables Days reflects that using supplier credit shortens the time your own cash is tied up in the cycle. For example, if Inventory Days are 40, Receivables Days are 30, and Payables Days are 20, the cycle is 50 days, meaning cash is tied up for about 50 days on average. Other formulations omit the inventory component or mis-sign the effects of payables, so they don’t measure the actual duration of the operating cash cycle.