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
Businesses that sell on long credit terms, such as distributors and contractors, tend to have longer cycles; compare your own cycle with your past periods.
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. To work out your own cycle, use the working capital calculator.