Working Capital Cycle
It’s said that cash flow is the lifeblood of a business. If that’s true, the working capital cycle is the heartbeat. These two serve as good indicators of your business’ overall health.
- Inventory days is how long your product stays in your business before it’s purchased by a customer.
- Accounts Receivable days is how long it takes to for customers to pay for their purchases.
- And Accounts Payable days is how long you have to pay for the merchandise you ordered.
- Inventory days + Receivable days – Payable days = Working Capital Cycle
- Imagine that you order a shipment of shoes, with 90 days to pay the supplier.
- You put the shoes in your online store, and it takes 100 days for all of them to sell.
- Because of your payment structure, it takes 15 days for the funds to reach you.
- If we put this into the equation, you would have 25 days in which this transaction leaves you with no cash on hand to cover it.
You may be able to cover the gap by borrowing money. This includes options like invoice factoring, accounts payable financing, and lines of credit, though each of these have fees and interest rates that apply.
You can also look for ways to shorten the gap by negotiating longer payment times with your suppliers.
There might be ways to get your customers to pay sooner, either by incentivizing quick payment or by accepting only cash or credit cards upon purchase.
It may also work to order inventory on a “just-in-time” basis and not stockpile inventory.