Which factor would increase the length of the working capital cycle?

Which factor would increase the length of the working capital cycle?

• A. Shorter receivables collection period
• B. Longer receivables collection period
• C. Shorter payables period
• D. Faster inventory turnover

Answer: (B)

The length of the working capital cycle tells you how long cash is tied up in the process of turning inventory into cash. It depends on three main factors: how long customers take to pay (receivables), how long inventory remains unsold (inventory days), and how long you take to pay suppliers (payables). The cycle length is essentially inventory days plus receivables days minus payables days. If customers take longer to pay, receivables days increase, which pushes the cycle length upward. If customers pay faster, the cycle shortens. If inventory sits longer, the cycle lengthens, while delaying payments to suppliers (increasing payables days) shortens the cycle. Since the question asks which factor would increase the length, the only option that lengthens the cycle is a longer receivables collection period.

The length of the working capital cycle tells you how long cash is tied up in the process of turning inventory into cash. It depends on three main factors: how long customers take to pay (receivables), how long inventory remains unsold (inventory days), and how long you take to pay suppliers (payables). The cycle length is essentially inventory days plus receivables days minus payables days.

If customers take longer to pay, receivables days increase, which pushes the cycle length upward. If customers pay faster, the cycle shortens. If inventory sits longer, the cycle lengthens, while delaying payments to suppliers (increasing payables days) shortens the cycle. Since the question asks which factor would increase the length, the only option that lengthens the cycle is a longer receivables collection period.