What is working capital cycle ?

Working capital cycle starts from raw material- > Which is converted to WIP (Work in progress)-> Converted to finished goods

• Finished goods are sent to warehouse for selling
• Sale of finished goods can be a cash sale or credit sale
• Cash sale- immediately finished goods converted into cash
• Credit sale- typically gives time of 2/3 months. Product sold , money returned with profits at end of 3 months. This also converts raw material into cash. Every time completing this cycle, we keep on adding profit,
• For example, Start with $ 100- addition of WCC, get 10% profit on sales, $ 1 profit, every time we complete this cycle, profit will keep adding on to our cash.
• Important: Every time we complete cycle, we get profitable. This cycle is typically calculated for period of one year.
• For FMCG, this cycle runs fast. Faster the cycle, more profitable company is. However, if manufacturing an airbus, of course working capital cycle is slow.
• In general, every company would be interested to increased number of cycles per year, reduce time taken by each step of working capital cycle.