It may sound like complex financial jargon but a working capital cycle (WCC) is an important concept for all business owners to understand. Who doesn’t want to find out how quickly a business is likely to turn a profit?
The working capital cycle measures just that: how fast a business can turn its assets into cash. At 51st Business Solutions, we can help you understand the cycle so you can better manage your firm’s cash flow, make money faster and enhance efficiency.
To comprehend net working capital, you have to know about your current assets. These can be converted into cash over a short period – typically a year. These assets may include accounts receivable, inventory, or any short-term investments. They do not include longer-term assets like physical equipment or real estate.
Current liabilities are those obligations and debts that also occur in the same period. This may be payroll, bills, or serving loans. Working capital is the firm’s current assets net of the current liabilities. To describe it another way, working capital is the assets that remain after the bills have been covered. And the working capital cycle begins when any assets are obtained to start the operating cycle and it ends when you are able to convert a product or service into cash.
It’s imperative that you are able to monitor your business’ finances. 51st Business Solutions can help with this by keeping a balance sheet or statement of your business’ assets, liabilities and capital. The value of a balance sheet is that it enables you to review how much working capital you have. As a result, you are then able to adjust payment cycles or manipulate other factors.
A working capital cycle’s stages depend on your business’s industry and the way you operate, but key elements remain the same. At 51st Business Solutions, we measure the cycle by the time it takes inventory to move, and how long before cash payments are received from sales. We then take away the length of time your business has in which to pay its bills.
For example, say it takes your business 60 days to turn its inventory into cash, and the bill for that inventory is due within 30 days. This means the business’s working capital cycle is 30 days in which the company will be short of cash.
In an ideal world, owners would like negative working capital cycles. This means they take payment for their goods and services prior to having to pay before their own bills are due. There are ways this can be achieved, like shifting inventory faster, getting customers to pay earlier, or negotiating longer payment terms with suppliers.
We can help you shorten the working capital cycle so that the quicker your business converts its assets into cash, the sooner that cash becomes available to help you run and grow your operations.
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