What is the formula to calculate the working capital cycle?

What is the formula to calculate the working capital cycle?

• A. trade receivable days + trade payable days - inventory days
• B. inventory days - trade receivable days - trade payable days
• C. trade payable days + inventory days - trade receivable days
• D. inventory days + trade receivable days - trade payable days

Answer: (D)

The cash conversion cycle measures how long funds are tied up in the operating cycle, from paying for inventory to collecting cash from customers, net of the time you can defer payments to suppliers. It is calculated by adding the days inventory is held to the trade receivable days (how long it takes to collect from customers) and then subtracting the trade payable days (how long you can delay paying suppliers). The correct formula is inventory days plus trade receivable days minus trade payable days. A shorter cycle means cash is freed sooner, while a longer cycle means more financing is needed. For example, if inventory sits for 40 days, receivables take 50 days to collect, and payables can be delayed by 20 days, the cycle is 40 + 50 − 20 = 70 days.

The cash conversion cycle measures how long funds are tied up in the operating cycle, from paying for inventory to collecting cash from customers, net of the time you can defer payments to suppliers. It is calculated by adding the days inventory is held to the trade receivable days (how long it takes to collect from customers) and then subtracting the trade payable days (how long you can delay paying suppliers). The correct formula is inventory days plus trade receivable days minus trade payable days. A shorter cycle means cash is freed sooner, while a longer cycle means more financing is needed. For example, if inventory sits for 40 days, receivables take 50 days to collect, and payables can be delayed by 20 days, the cycle is 40 + 50 − 20 = 70 days.