# Operating (Working Capital) Cycle
The operating cycle is a useful tool for managing working capital. It analyses the accounts receivable, inventory and accounts payable cycles in terms of number of days.
## What it measures
The working capital cycle indicates the length of time between a company paying for materials (entering them into stock) and receiving cash from the sale of finished goods.
Three elements are analysed by average days:
- Receivables — average number of days taken to collect an account.
- Inventory — average number of days taken to turn over the sale of a product (from arrival in store to conversion into cash/receivable).
- Payables — average number of days taken to pay a supplier invoice.
## The cash flow loop
```
Cash → Raw Material + Labour + Overhead → WIP → Stock (Finished Goods) → Receivables → Cash
```
The cycle length is found by adding the days required at each stage (less the credit obtained from suppliers).
## Operating Cycle Formula
```
Operating Cycle = R + W + F + D − C
```
Where:
- R = Raw material storage period
- W = Work-in-progress (works cost) holding period
- F = Finished goods storage period
- D = Receivables (Debtors) collection period
- C = Credit period allowed by suppliers (Creditors)
```
Number of Operating Cycles in a Year = 360 (or 365) ÷ Operating Cycle
```
More operating cycles per year is better — it indicates a shorter operating cycle.
## Why it matters: Time = Money
Each component (inventory, receivables, payables) has two dimensions — Time and Money.
| If you… | Then… |
|---|---|
| Collect receivables faster | You release cash from the cycle |
| Collect receivables slower | Your receivables soak up cash |
| Get better credit from suppliers (duration/amount) | You increase your cash resources |
| Shift inventory faster | You free up cash |
| Move inventory slower | You consume more cash |
## Financing the cycle
Most businesses cannot finance the operating cycle (receivable days + inventory days) using accounts payable financing alone. The shortfall is typically covered by:
- Net profits generated internally, or
- Externally borrowed funds, or
- A combination of the two.
The net operating cycle represents the time interval for which the firm has to negotiate for working capital from its lenders. Its duration varies with the nature of the business, and its length is an indicator of management performance.