Many businesses have positive working capital cycles, and have a period of time they are waiting for payment. If you have a negative cycle, it means you have collected payment sooner than when payment is due to your supplier, meaning your formula equates to a negative number.
An example of a negative working capital cycle could be:
21 Inventory Days + 30 Receivable Days - 60 Payable Days = -9 Days
Businesses will attempt to achieve a negative working capital cycle, as it will allow them to be paid for their sales before paying for the stock itself. This can be done by shortening payment terms from customers, or by lengthening their own payment terms.
How to improve your working capital cycle
There are plenty of simple ways to improve your working capital cycle, and therefore your cashflow. A positive cycle is not necessarily bad news, but you must be prepared, and have the available funds to pay for the purchased assets.
On paper, the solutions to a positive cycle are easy, reduce inventory days, reduce receivable days, and increase payable days.
The easiest way to decrease your cycle time is to sell your stock faster. Of course, this is much easier said than done, but this will decrease your cycle dramatically. This can also save you expenses on storage costs.
Receivable days aren’t as simple to get shortened, so an invoice management method could be the answer. Reducing our invoice terms, or improving your credit collection process are the easiest methods of doing this. An Invoice Finance facility is a popular method to release funds tied up in invoices, therefore shortening your cycle.
Changing your payable days is the more difficult step, as other businesses are typically not keen to alter them. There are plenty of facilities that can be put in place to fix this, such as a revolving credit facility allowing you to delay payments up to 30 days.
As a founder of multiple businesses, Jamie believes that mindset, discipline and ambition are key drivers for success, both for his businesses and for his clients.
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