Keeping enough cash on hand to meet your day-to-day needs is a vital part of running a business. If you can’t balance the books and maintain sufficient working capital to operate smoothly from day to day, you’ll quickly face financial challenges. 

Monitoring and improving the working capital cycle is important for every business, as it helps reduce cash flow issues, enabling you to pay your bills and meet other obligations while still investing in growth opportunities. 

We explore how to calculate your working capital cycle and interpret the results, and offer practical steps to improve your cash conversion efficiency.  

What is the working capital cycle?

The simple working capital cycle definition is the time it takes to convert net current assets into available cash, measured in days, which is the period between buying goods, materials and inventory and receiving payment from sales. 

The longer your working capital cycle, the more time your money is unavailable for paying bills and suppliers or purchasing key assets or new stock. A shorter cycle means you release cash faster, and your business is more agile and efficient.

You may have heard the terms cash conversion cycle and working capital cycle, but they have the same meaning.   

The key elements of the working capital cycle

There are four main elements in a working capital cycle that you need to keep a close eye on:

• Available cash: Your working capital to support day-to-day needs. A healthy cash balance means successfully managing your cash inflows and outflows to ensure you have enough available to meet your obligations.
• Receivables: The payment process and terms for the goods and services that you supply to your customers.
• Inventory: Your stock and other components that support it. It’s important to know how long capital is tied up in stock before it’s sold. 
• Payables: This is the time you have to pay your suppliers and bills.

A typical working capital cycle step-by-step scenario

Let’s look at how most working capital cycles work. Below are the typical steps involved:

1. You have available cash (what your business has in the bank).
2. Your business buys inventory/assets from suppliers on credit (stock, tools, raw materials or services), who offer their credit terms (such as 30–60 days to pay).
3. You hold the inventory/assets – the assets may be held in your warehouse or in-store, or used in production (if physical).
4. Your company sells the resulting goods or services (sometimes on credit, depending on your industry).
5. You collect money from clients/customers, who pay the money owed either at the point of sale according to invoices after an agreed credit period.
6. Accounts teams pay your suppliers and other creditors, completing the working capital cycle (the days required to convert assets to cash).
7. The cycle continues – remaining available cash can be used again to invest in new assets to drive revenue.

How to calculate the working capital cycle

To calculate the working capital cycle, you add the number of inventory days to receivables days, then subtract the number of payable days. So, the working capital cycle is as follows:

Inventory days + receivable days - payable days = working capital cycle days

Your resulting working capital cycle formula days are what you need to monitor and optimise, as this is the number of days it takes to convert current assets into available cash for business purposes. Essentially, your window of opportunity.   

Breaking down the working capital cycle formula

Let’s look at how to work out your working capital cycle now that you know the formula, using the generic example calculation below:

• 50 inventory days
• 25 receivable days
• 55 payable days  

Calculation: 50 + 25 - 55 = 20 working capital cycle days 

20 represents the number of days the business must draw on its available cash before receiving payment.

A negative working capital cycle might be as follows: 30 days to sell your inventory, 25 days to receive payment, and 50 days to pay what you owe to suppliers.

Calculation: 30 + 25 - 50 = -5 working capital cycle days 

Working capital cycle example

As mentioned, working capital cycles can be longer, shorter or more complicated, depending on the industry (say, between a retailer and a manufacturing firm).

Here’s a working capital cycle calculation example for a hypothetical furniture manufacturer: 

• The manufacturer sources raw materials from a supplier, which offers terms of 60 days of credit. 
• The manufacturer holds the materials for around 20 days before production.
• Production time takes around 10 days. 
• The finished product is held as stock for around 30 days.
• Retailers who buy the furniture pay the firm, on average, after 50 days. 

The working capital cycle formula and calculation in this example would look like this:

• Inventory days = 60 (20 for raw materials + 10 for production + 30 for finished goods to sell).
• Receivables days = 50
• Payables days = 60

Applying the formula results in the following capital cycle calculation:

•  Manufacturing firm’s WCC (60 + 50 – 60) = 50 days

How the working capital cycle impacts your business

Don’t underestimate the importance of the working capital cycle. It directly influences cash flow, liquidity, and the overall financial stability of your business. A cycle that is too long can stretch your resources, delay growth plans, and leave you short of cash when you need it most.

Cash flow shortages are continually a top challenge for small businesses. According to our 2025 SME index research, 41% of brokers said the most requested reason for applying for unsecured finance was to manage day-to-day cash flow.

The principle is simple: The longer your working capital cycle, the harder it is to maintain strong cash flow, which is the lifeblood of every business.

What it means to have a positive working capital cycle

A positive working capital cycle essentially means you pay suppliers before you receive cash from customers. This is a common scenario, but long receivable periods or late payments can strain your cash flow. For example, if you pay suppliers in 30 days but customers take 60 days to pay, you must fund the 30-day gap. 

A larger number of days in a positive cycle restricts your ability to invest in new stock, take on new projects or meet payroll requirements.

What if you have a negative working capital cycle?

If you have a negative working capital cycle, it means the number of days spent waiting to receive cash from customers is smaller than the number of days you have to pay your suppliers, giving you a negative figure. This helps with cash flow as it means you’ll have the money available for operational needs. 

Despite the terminology, a negative cycle is generally a good thing for businesses, as long as it results from efficient operations rather than delaying supplier payments, which can damage supplier relationships.

What is a good working capital cycle?

A good working capital cycle can be hard to define, as cycles vary between industries. However, shortening the time to convert current assets to cash is generally good practice. 

While the optimal number varies by sector, a shorter cycle can improve liquidity, strengthen cash flow and lessen your reliance on capital borrowing and credit, helping your business to operate smoothly. In the UK, between 30 and 45 days is generally regarded as a good working capital cycle for SMEs.

Certain sectors have different typical cycle lengths, influenced by factors like seasonality, complex supply chains and varying payment schedules.

What industries have the lowest working capital cycles?

Many businesses operate with negative working capital cycles, such as supermarkets, retailers and ecommerce businesses and digital service providers. In most cases, the companies receive payments immediately or consistently, and inventory is turned over quickly (if any is held at all, in certain digital businesses).

Meanwhile, in sectors like construction, many tools/materials are required upfront, with receivables for construction projects taking a lot longer than in most other industries.

Key working capital cycle metrics to monitor alongside your main conversion cycle figure  

Alongside working our your working capital cycle, here are related metrics to track to gain greater insights around influencing factors and where to make improvements: 

• Inventory turnover ratio: This measures how quickly inventory stock is sold and replaced over a certain time. It’s calculated by dividing the cost of goods by the average inventory over the same period. A high inventory turnover ratio is a positive indicator. 
• Days sales outstanding (DSO): Your DSO records the average number of days it takes to collect payment following a sale. If this figure is low, it indicates an efficient receivables process. 
• Days payable outstanding (DPO): Your DPO equates to the average number of days it takes to pay a supplier. Companies with higher DPOs hang on to cash longer than those with lower ones. This is fine if it’s an amicable trade credit agreement, but if not, delayed payments can strain supplier relationships.

It’s also important to monitor your overall working capital calculation and working capital ratio, as this helps you to get richer insights about your financial health.

How to improve your working capital cycle

There are various ways to reduce the number of days your company takes to convert current assets into cash, from strengthening supplier relationships to tightening your credit control and inventory management. Below, we’ve outlined some practical steps to improve your working capital cycle: 

1. Accelerate receivables with automation and clear communications: Aim to make invoicing processing and payment collection more efficient, by clearly communicating payment terms upfront, using automated workflows and alerts to improve credit control, ensure accountability and reduce late payment risk.
2. Reduce inventory days with better stock management: Prevent overstocking and minimise the impact of slow-moving products by using modern forecasting tools, demand planning methods and techniques like just-in-time (JIT) to closely align inventory levels with demand.
3. Incentivise faster customer payments: Consider offering discounts to incentivise early or faster payments and follow up promptly on overdue accounts, supported by credit control tools.
4. Extend your payable days (where possible): Negotiating longer supplier payment terms enables you to hold onto available cash for longer, while keeping good relationships. Also, consider arranging supplier credit (also known as reverse factoring), which allows suppliers to get paid early (by a factoring partner) while you can still enjoy extended payment terms.
5. Optimise processes with smart modelling and forecasting: Having a sophisticated framework for working capital management, using various monitoring, modelling and forecasting tools, analytics and KPIs, will help you identify potential cash flow gaps, process inefficiencies and ways to shorten your cash conversion cycle.
6. Leverage working capital finance: Timely/flexibility working capital finance facilities, like invoice financing, revenue-based funding or short-term loans and revolving credit lines, offer faster access to cash tied up in receivables to purchase new stock/assets and ease financial pressures in key periods.

What are working capital loans?

Working capital loans can be a crucial safety net for businesses that need to fill cash flow gaps and maintain sufficient working capital for various needs and purposes. 

Here are some of the common types of working capital finance to consider:

• Unsecured business loans: Short-term loans that don’t require collateral, which can often be accessed online within a few days or hours.
• Lines of credit: A revolving credit line to use as and when needed, only incurring interest on the funds you draw down from the agreed limit.
• Inventory finance: Working capital funding secured against inventory to allow retailers to boost stock levels without impacting cash flow.
• Invoice finance: A quick and easy way to unlock cash tied up in upcoming client invoices, getting an advance of their value for other operational needs as an alternative to long-term debt commitments.
• Merchant cash advances: A sum of capital to be repaid as a percentage of future card sales, which means repayments align with cash flow.

You should also consider trade credit, as short-term credit agreements with suppliers to receive goods in advance and pay for them later than usual, which can ease cash flow and help you get revenue in before large outlays.

Flexible working capital finance from iwoca 

At iwoca, we offer fast and flexible business loans designed for the challenges SMEs face with cash flow and working capital. We can help you balance these key components while offering capital to invest in business growth.

Borrow between £1,000 and £1 million for days, weeks and months (up to 60 months) with terms tailored to your cash flow and no charges for early repayment.

You can apply online in minutes and get a decision within 24 hours, or use our business loan calculator to get a snapshot of your likely repayments with iwoca.

‍