Quick answer
The working capital cycle, also called the cash conversion cycle, is the number of days between paying out cash for stock or labour and collecting cash from customers for the finished sale. It's calculated as stock days plus debtor days minus creditor days. The longer the cycle, the more cash a business needs tied up just to keep trading, and the more it may need to borrow as it grows.
Key points
- Formula: stock days + debtor days − creditor days
- Each day cut from the cycle frees roughly one day of cost of sales in cash
- Growth stretches the dollars locked in the cycle even if the number of days stays put
- Invoice finance and trade finance work by shortening the cycle, not by fixing profit
Picture a dollar leaving your account to pay a supplier. It becomes raw materials, then finished stock, then a sale on credit, then an invoice sitting in a customer’s accounts system. Eventually it comes back. The working capital cycle counts how many days that round trip takes.
While the dollar is away, you can’t spend it on anything else. That’s why the cycle matters so much to cash flow and to borrowing.
How do you calculate it?
The cycle has three parts:
- Stock days: the average shelf life of inventory until a sale. Average stock ÷ cost of sales × 365.
- Debtor days: the typical wait between invoice and payment. Average trade debtors ÷ sales × 365. See debtor days.
- Creditor days: the time you hold supplier bills before settling them. Average trade creditors ÷ cost of sales × 365.
Cycle in days = stock days + debtor days − creditor days
Service businesses with no stock simply drop that part. Builders and other contractors often count work in progress in place of stock.
How does it look across industries?
| Business | Stock days | Debtor days | Creditor days | Rough cycle |
|---|---|---|---|---|
| Café (cash and card sales) | 5 | 0 | 14 | Negative |
| Trade supplies wholesaler | 50 | 40 | 30 | 60 days |
| Furniture manufacturer selling to retailers | 70 | 55 | 30 | 95 days |
| Marketing agency | 0 | 45 | 15 | 30 days |
These are illustrations, not benchmarks. The point is how different the cash needs are for businesses with similar turnover.
Why the cycle matters when you borrow
A long cycle means the business must fund weeks or months of costs before the money comes back. If turnover grows while the cycle stays the same, the dollars tied up grow with it. That’s the core reason profitable businesses run out of cash.
Lenders look at your aged receivables, stock levels and supplier terms to understand your cycle. Some products are built around it. Invoice finance advances most of an invoice’s value soon after you raise it, cutting debtor days in practice. Trade finance pays overseas suppliers up front and gives you longer to repay, stretching creditor days. A cash flow gap calculator can help size how much the cycle is costing you in cash.
Is a long cycle squeezing you as orders grow? Run your situation past us and we’ll suggest which kind of funding targets it.
Worked example: what ten days are worth
An Adelaide furniture maker turns over $3.65m a year, with cost of sales of $2.19m. That’s about $6,000 of costs per day ($2.19m ÷ 365).
Its cycle is 95 days: 70 stock days, 55 debtor days, 30 creditor days. So roughly $570k is tied up at any time ($6,000 × 95).
The owner makes three changes: fewer slow-selling timber lines (stock days down to 60), deposits on custom orders and prompt invoicing (debtor days down to 45), and 45-day terms with its main timber supplier (creditor days up to 45). The new cycle is 60 days, about $360k tied up. That releases around $210k without borrowing a cent. Even one change, ten fewer stock days, frees about $60k.
Before agreeing terms with a large retailer, the owner also checks the public Payment Times Reports Register, where businesses with large incomes report how fast they pay small suppliers.
Related terms
- Working capital: current assets minus current liabilities
- Debtor days: one of the three building blocks of the cycle
- Aged receivables: unpaid invoices sorted by age
- Factoring: selling invoices to a funder for quick cash
Need cash while the cycle catches up?
Tightening the cycle takes months. Funding can bridge the gap in the meantime. Banks are worth approaching first for an overdraft or debtor facility when your financials meet their bar, and there are specialist invoice and non-bank lenders when they don’t.
Enquiring with us is quick, a minute or so. It won’t register as a credit check, and we’re not in the business of passing your enquiry on to a swarm of lenders who all ring at once. An actual person reads your answers, then picks up the phone to discuss options. Please be exact about turnover, debtors and supplier terms, because those numbers point us straight to the right product.
Frequently asked questions
Is the working capital cycle the same as the cash conversion cycle?
Yes, they describe the same thing. Some accountants also call it the operating cycle or cash cycle, though the operating cycle sometimes excludes creditor days.
What is a good working capital cycle?
It depends heavily on the industry. A café paid at the counter might have a cycle of a few days or even a negative one. A manufacturer selling to retailers on 60-day terms could easily run 90 days or more. Compare yourself with your own past results and similar businesses rather than a single benchmark.
Can the working capital cycle be negative?
Yes. If customers pay you before you have to pay suppliers, the cycle is negative and suppliers are effectively funding your stock. Supermarkets and some online retailers operate this way.
How do I shorten my working capital cycle?
Hold less slow-moving stock, invoice promptly and follow up overdue accounts, offer easy payment options, and negotiate longer supplier terms where you can. Invoice finance can turn debtors into cash within days of invoicing.
Where can I see how quickly large customers pay small suppliers?
The Payment Times Reporting Scheme publishes reports from large businesses on how quickly they pay small business suppliers. You can search the public register before agreeing terms with a big customer.