What Is Meant by Working Capital Cycle?
CAs and CLs go into the calculation of net working capital and are realized and settled in one year’s time. A company pays off what it owes to its creditors in a year’s time, and it gets what others owe it in the same time frame. That means it could take anywhere from 1 month to 12 months for a company to convert its current assets and liabilities into cash.
WCC reflects the efficiency of a company in managing a short-term solvency position. A company with an efficient system in place would be able to collect what is due from debtors and give what it owes to creditors, both in a rapid way. The shorter the cycle, the more quickly the organization can free up its revenue funds tied up in working capital. When WCC is way too long, the funds get tied up in the operating cycle without earning returns. As a result, a company may attempt to shorten its working capital cycles in order to enhance its short-term liquidity state and increase business efficiency.