What Is The Working-Capital Cycle, And How Does It Affect Profitability?

What is working capital cycle? Know the various phases & how it impacts the business profitability. Read to know more details here with IIFL Finance!

31 Jul,2022 10:53 IST 272
What Is The Working-Capital Cycle, And How Does It Affect Profitability?

Every business, big or small, goes through various stages of the business cycle, from its inception to success. The Working Capital Cycle ensures the company has a positive cash flow. As it can highly influence profitability, it is noteworthy that you understand its meaning.

What Is The Working Capital Cycle?

Working Capital Cycle is the time for a business to convert its net assets and current liabilities into liquid cash to leverage for various other business operations. That is the difference between buying the product and the payment offered by the vendor, supplier, or customer.

For example, there is always a delay between selling inventory, products, or delivering a service and receiving the payment for the goods or services offered. This delay can harm the business cash flow to run other operations smoothly. The difference between the time taken to deliver goods or services and receiving the payment is the working capital cycle. It allows businesses to free up cash as soon as possible and have a positive cash flow.

There are four general phases of the working capital cycle:

• Cash:

For businesses to ensure a healthy cash flow by reducing the time between outflows and inflows.

• Receivables:

The outstanding payments for the products sold or services rendered.

• Inventory:

The time it takes for a business to sell all the goods and receive the cash payment.

• Billing:

The time it takes for a business to pay its vendors or suppliers and reduce its current cash.

How Does The Working Capital Cycle Affect Profitability?

Every business tries to reduce the working capital cycle as much as possible to increase the positive cash flow. The lower the time to turn net assets and current liabilities into cash, the higher the profits. However, as a business goes through various phases, the working capital cycle can affect profitability differently.

Here’s how the working capital cycle can positively affect a business profitability:

1. The Initial Stage

The working capital cycle can positively affect the business in the initial stages as expenses like furniture, equipment, and machinery are the highest. Since it has more cash because of the working capital cycle, the business can spend more on vital things to kickstart operations effectively.

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2. Expansion

At the time of expansion, the business needs increased capital to invest in its expansion plans. The plans may include opening new offices, manufacturing new products, starting new services, marketing, or hiring more employees. The working capital cycle can allow your business to realize cash faster to implement your expansion plans.

3. Acquisition

The general business cycle includes getting and investing in new business opportunities like acquiring or merging with a different business that demands high cash payments. A lower working capital cycle ensures the company has enough capital to forgo some business opportunities.

4. Business Losses

Losses are a part of the general business cycle that may arise due to numerous factors such as inflation and recession and can force the business to realize less revenue and profits. In such a case, a lower working capital cycle can allow the business to mitigate the effect of low revenue and have enough funds to invest in the operations, thus increasing profits.

Avail Of A Business Loan With IIFL: How Can It Help?

Lowering the working capital cycle is a complex, time-consuming, and expensive task which may force the business to incur more expenses. One ideal way to meet capital requirements is through business financing, like a business loan from IIFL Finance. The business loan offers instant funds up to Rs 30 lakh with a quick disbursal process. You can apply for the loan online or offline by visiting IIFL Finance nearest branch.

FAQs

Q.1: What is the working capital cycle formula?
Ans: Inventory Days + Receivable Days - Payable Days = Working Capital Cycle in Days

Q.2: Why should I take a business loan from IIFL?
Ans:
• Instant loan amount up to Rs 30 lakh
• Easy and online application process
• Instant credit of loan amount to your bank account
• Affordable EMI repayment options

Q.3: Can I use IIFL Finance business loan for business financing?
Ans: Yes, you can use the business loan amount to finance your business and ensure a lower working capital cycle.

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