Which Are the Elements of Working Capital Cycle?
The shorter the WCC, the quicker you are able to free up your cash tied up in net working capital. The four key elements of this are cash, accounts receivable, accounts payable, and inventory.
Accounts receivable refers to creditors or third-parties who owe you money. Accounts payable comprise debtors, third-parties whom you owe money. You need to have full control over these items to have a fairly efficient and controlled working capital cycle.
The formula for the working capital cycle is as follows: WCC = Inventory Days + Debtors Days – Creditors Days. The calculation would show the liquidity of your stock. Shorter days inventory due means you can convert your stock into cash sooner. In this case, the inventory is very liquid.
Debtors in days refer to how fast a company collects cash from debtors. The longer your company takes to collect it, the higher the number of receivable days. Creditors’ days are similar to accounts receivable days. It estimates the average number of days your company takes to settle its debts with suppliers/creditors.