What is Working Capital Cycle?
The working capital cycle (also known as the cash conversion cycle) is the average number of days it takes a business to convert resources into cash flow, calculated as days inventory outstanding plus days sales outstanding minus days payable outstanding.
How It Works
- Formula: WCC = DIO + DSO – DPO.
- DIO (Days Inventory Outstanding) = inventory / COGS × 365.
- DSO (Days Sales Outstanding) = receivables / revenue × 365.
- DPO (Days Payable Outstanding) = payables / COGS × 365.
Saudi Context
Saudi distributors and contractors face long working capital cycles (often 90 to 150 days) due to extended customer payment terms in B2B and government contracting, particularly with line ministries and Aramco. Saudi banks offer working capital financing (overdraft, revolving facilities) tied to the cycle length, and PIF-backed initiatives are working on early payment programs for SMEs.
Example
A Saudi distributor has DIO 60 days, DSO 75 days, DPO 45 days. Working capital cycle = 60 + 75 – 45 = 90 days. Cash is tied up for 90 days on each operating cycle.