Profitable businesses can go broke simply because they don’t manage their working capital cycle and run out of cash.

Your working capital cycle is the number of days your cash is tied up to take your goods and services through the sales process. The longer the cycle, the more cash you will have tied up and the greater the risk to your business.

The formula for calculating your working capital cycle is:

Stock (or work in progress) days + debtor days – credit days

Where stock days = stock / annual sales x 365
Debtor days = current debtor balance / annual sales x 365
And credit days = the number of days until you need to pay your suppliers

For example, if your stock days are 45, debtor days are 60 and credit days are 30, your working capital cycle is 75 days.

Assuming daily sales are $5,000, the business will need either cash on hand or access to a line of credit of $375,000 to stay afloat ($5,000 x 75 days).

To shorten your working capital cycle, consider the following strategies:

  1. Reduce your stock holdings.
  2. Invoice more often.
  3. Change your payment terms.
  4. Use a debt collector or credit controller.
  5. Negotiate more favourable terms with suppliers.

There are many more ways to shorten your working capital cycle – ask us for more!

We can help you calculate your working capital cycle and identify specific ways to shorten it so you can free up more cash in your business.

“Making more money will not solve your problems if cash flow management is your problem.” – Robert Kiyosaki

This information does not constitute financial or legal advice and is for general information purposes only. Please contact DLA Partners for specific advice relating to your particular circumstances.

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