The working capital cycle shows you how well cash is flowing through your business. The cycle tells you how long your money is tied up in inventory, how quickly customers are paying you, and how much breathing room you have before your bills are due. These are signals of how resilient or strained your operations are.

Below, we’ll describe the working capital cycle, what drives it, and how to tighten it up so your cash can work harder for your business.

What’s in this article?

• What is the working capital cycle?
  
• What are the stages of the working capital cycle?
  
• How do you calculate the working capital cycle?
  
• Why is a shorter working capital cycle better for business?
  
• What are the challenges of a long working capital cycle?
  

What is the working capital cycle?

The working capital cycle is how long it takes your business to convert its total net working capital into cash. The cycle tracks how long cash is tied up in inventory and accounts receivable and how quickly you can turn that investment back into available funds.

Here’s the basic flow:

• You buy inventory or raw materials (sometimes on credit).

• You sell to customers.

• You collect payment.

• You repeat the process.

The goal is to keep that loop short and steady—the longer your money is tied up in stock or unpaid invoices, the more difficult it is to cover costs or respond to opportunities.

A short cycle means your business is efficient: you’re selling inventory quickly, collecting payments promptly, and using supplier payment terms to hold on to cash a little longer. A long cycle means more of your cash is locked up, which can strain liquidity even if business is booming.

Some businesses operate with a negative working capital cycle, which means they get paid by customers before they have to pay suppliers. But for most businesses, the working capital cycle is a moving target that must be monitored and managed carefully to ensure there’s enough cash on hand to keep the business running.

What are the stages of the working capital cycle?

The working capital cycle is a real-time loop that determines how long your business will be paying out of pocket before receiving payment. Though the cycle looks different across industries, the underlying pattern is consistent.

There are three stages that define this loop: inventory, accounts receivable, and accounts payable.

Inventory

You purchase inventory on credit, often with net 30, net 60, or net 90 payment terms. Inventory is classified as a current asset when it comes to working capital, but the longer inventory sits unsold, the longer that cash is frozen. If your inventory turns over quickly, your cash is freed up.

This stage is affected by:

• Your inventory strategy (just-in-time vs. bulk ordering)

• Your ability to forecast demand

• How fast you can move stock through production or fulfillment

The relevant metric is Days Inventory Outstanding (DIO), a direct measure of how long your money sits on the shelf.

Accounts receivable

Once goods or services are sold, you enter the receivables stage. This is the time between making a sale and receiving payment. If you sell on credit terms (net 30, net 60, or more), this stage can drag on and leave your cash in limbo even though the work is done.

This stage is affected by:

• How quickly and accurately you invoice

• The payment terms you offer (and enforce)

• How well you follow up on late payments

• The payment methods you accept (e.g., real-time transfer vs. check)

The longer this stage lasts, the longer you’re carrying the financial burden of that sale. The metric to watch is Days Sales Outstanding (DSO)—your average collection period.

Accounts payable

This final stage is about how long you have to pay suppliers or vendors. Strong payables management means making full, smart use of the credit terms you’ve negotiated without compromising relationships or incurring penalties.

This stage is affected by:

• Stretching payment terms (within reason)

• Using accounts payable (AP) automation to pay right on time (not early or late)

• Syncing payables with cash inflows to smooth out liquidity

The relevant metric is Days Payables Outstanding (DPO), how long it takes on average to pay suppliers. The higher the metric is (without compromising vendor relationships), the more cash you retain for longer.

How do you calculate the working capital cycle?

The working capital cycle is shaped by these factors:

• How long inventory sits before it’s sold

• How quickly you get paid after a sale

• How long you wait before paying your bills

Formula: Working Capital Cycle = Inventory Days + Receivables Days – Payables Days

Each of those inputs reflects an important part of how money moves through your business. Here’s how to calculate them:

Inventory Days (DIO)

This tells you how long, on average, your inventory stays in stock before it’s sold.

Formula: DIO = (Average Inventory / Cost of Goods Sold [COGS]) × 365

For example, if you hold $50,000 in inventory and your annual COGS is $300,000:

• (50,000 / 300,000) × 365 ≈ 61 days
  

That means your cash is locked in inventory for about two months before it moves to the next stage.

Receivables Days (DSO)

This measures how long it takes to collect payment after a sale. The clock starts when you invoice a customer and that sale becomes a receivable.

Formula: DSO = (Average Accounts Receivable / Net Revenue) × 365

For example, with $200,000 in receivables and $1.2 million in annual revenue:

• (200,000 / 1,200,000) × 365 ≈ 61 days
  

It takes you roughly two months, on average, to turn a sale into cash.

Payables Days (DPO)

This measures how long you take to pay suppliers.

Formula: DPO = (Average Accounts Payable / COGS) × 365

For example, if you owe $150,000 and your annual COGS is $600,000:

• (150,000 / 600,000) × 365 ≈ 91 days
  

So, it takes you about three months to pay suppliers.

If your payables stretch longer than the time it takes to sell inventory and collect payment, your working capital cycle becomes negative. That means customers are effectively financing your operations, and many successful retailers and subscription businesses operate this way. But it takes discipline and precision to sustain.

Why is a shorter working capital cycle better for business?

A shorter working capital cycle means your cash gets back to you faster— it improves liquidity, reduces financing costs, and offers your business more flexibility.

Here’s how it plays out:

Stronger liquidity

The less time your cash is tied up in inventory or invoices, the more of it you have on hand. That means you’re in a better position to cover operating expenses, respond quickly to opportunities, and withstand unexpected slowdowns or delays. A tighter cycle keeps more of your cash in circulation instead of sitting idle in receivables or unsold stock.

Lower financing costs

When your operating cash gap shrinks, you rely less on external funding, such as credit lines or short-term loans. That means you pay less in interest and fees and reduce dependence on outside capital.

More flexibility and control

Cash that moves quickly gives you options. You’re not waiting on past sales to finance your next move. Instead, you can invest in growth with confidence, reinvest profits sooner, and adjust faster if market conditions change. A faster cycle builds agility into your business.

Lower operational risk

The longer your cash is tied up, the more vulnerable you are to disruption. A late payment from a customer, a spike in raw material costs, or a shipment delay hit harder when you’re already stretched thin. A short cycle gives you more buffer to absorb risk.

What are the challenges of a long working capital cycle?

A long working capital cycle means your money stays tied up longer, sitting in inventory or waiting on outstanding invoices. Over time, that drag can create issues across nearly every part of your business.

Here’s where it affects you:

Cash flow strain

When it takes too long to turn your assets into cash, you’re left funding the gap. You still need to pay suppliers, even if you’re waiting weeks or months to collect on sales. Your profit and loss statement might look strong, but liquidity can get tight fast. That gap puts pressure on your ability to meet short-term obligations.

Dependence on external financing

To stay afloat during a slow cycle, many businesses turn to short-term loans, lines of credit, or invoice financing. Though these tools are useful, they come at a cost. Interest and fees erode margins, heavy reliance on debt reduces financial flexibility, and any disruption in access to financing can quickly become a crisis.

Higher operating costs and risk exposure

The longer cash is tied up, the more it costs you to manage it. Inventory that doesn’t move fast takes up space and increases storage costs. Perishable or seasonal goods risk spoilage or obsolescence. Late payments from customers raise the risk of bad debt from receivables that will never be collected. And chasing overdue invoices adds overhead to your finance and operations teams. In each scenario, you end up spending more while you wait for cash to come in.

Payment delays

When cash runs tight, businesses often start slowing payments. That can lead to missed discounts for early payment, late fees or penalties, or damaged supplier relationships and reduced negotiating power. What starts as a timing issue on your end can ripple outward and affect your supply chain, partnerships, and reputation.

Constrained growth

Cash tied up in operations isn’t available for new product lines, expansion plans, hiring, and marketing. Even if you’re seeing strong demand, a slow cash cycle can prevent you from capitalizing on it. Growth slows if you aren’t able to fund it.

Greater vulnerability to disruption

A long cycle leaves you exposed. If demand dips, a customer defaults, or supply costs spike, you have less working capital available to absorb the hit.