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Working capital cycle (Cash Cycle/PTP-STC Cycle ) is calculated in days and its the time duration between buying goods to manufacture or trade products and generation of cash revenue on selling the products. The shorter the working capital cycle, the faster the company is able to free up its cash stuck in working capital. If the working capital cycle is too long, then the capital gets locked in the operational cycle without earning any returns. Therefore, a business tries to shorten the working capital cycles to improve the short-term liquidity condition and increase their business efficiency.
The working capital cycle focuses on4 elements to control the working capital cycle: Cash, Receivable, Payable, & Inventory.
In general, to reduce the working capital cycle:
1. Reducing the credit period given to its customers and thereby reducing the average collection period. better and efficient collection. (Increase receivable turnover/Decrease average collection period)
2. Improve/streamline its process of manufacturing and focus on various ways to increase sales to reduce the time taken for inventory to convert to sales. (Increase Inventory turnover)
3. A better negotiation to increase the credit period from suppliers. (Decrease Payable turnover/Increase average payments period).
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