Calculate and interpret the working capital cycle
Combine the three operating-day measures to estimate how long cash is tied up in the operating cycle.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Use the ratio formulae in the syllabus appendix exactly; Cambridge states these are the only formulae accepted. Use year-end balances where appropriate unless the question specifies averages, and round to the requested number of decimal places. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the AS Topic 1.6 ratio, financial-statement and stakeholder skills. These lessons add only the A Level ratios and interpretation required by Topic 3.5.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Why are trade payables days subtracted in the cycle?
What you will learn
- Use the syllabus working capital cycle formula
- Explain why supplier payment days are subtracted
- Interpret a change without assuming that shorter is always better
Apply the exact cycle formula
Working capital cycle (days) = trade receivables turnover (days) + inventory turnover (days) − trade payables turnover (days). Calculate or select each component first, then add receivables and inventory days and subtract payables days.
Payables days are subtracted because supplier credit delays the cash payment for inventory or purchases. A positive cycle is an indicator of time between outflows for operating inputs and collection from customers; it is not a direct cash forecast.
Use context before proposing an action
A longer cycle can increase the amount of cash tied up and borrowing needs. Possible responses include better credit control, stock planning or supplier terms, but each has a trade-off: strict credit may lose customers, low stock may interrupt sales and delayed supplier payment can damage relationships.
A shorter cycle may release cash, but it is not automatically good. Compare the components, business model, prior year and operating constraints. A change driven by late supplier payments can signal financial pressure rather than improved efficiency.
Pause and explain
A business's cycle falls because it pays suppliers much later. What should an analyst check?
Worked example
Receivables days are 36.5, inventory days 45.625 and payables days 36.5. Calculate the working capital cycle.
Show the worked solution
- Add receivables and inventory days: 36.5 + 45.625 = 82.125.
- Subtract payables days: 82.125 − 36.5 = 45.625.
- The cycle is 45.625 days, rounded only as instructed.
Answer The working capital cycle is 45.625 days. Supplier credit reduces the period funded by the business.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Receivables days are 42, inventory days 55 and payables days 36. Calculate the working capital cycle.
Give me a hint
Add the first two periods and subtract payables days.
Compare my reasoning
- 42 + 55 = 97 days before supplier credit.
- 97 − 36 = 61 days.
- Check that payables days were subtracted and label the result in days.
The working capital cycle is 61 days.
Look for these in your work
- Add receivables and inventory days.
- Subtract payables days.
- Report the result in days.
A manufacturer's cycle changes from 68 to 54 days: receivables fall by 5 days, inventory falls by 12 and payables days rise by 3. Reconcile the change.
Give me a hint
Apply the signs in the cycle formula to each component movement.
Compare my reasoning
- Receivables movement reduces the cycle by 5 days.
- Inventory movement reduces it by 12 days; the 3-day increase in payables days also reduces it by 3.
- Total change = −5 −12 −3 = −20 days, so the cycle becomes 48 days, not 54; the supplied headline conflicts with the component changes.
The components imply a 20-day reduction to 48 days. Flag the conflict with the reported 54 days and investigate before relying on either figure.
Look for these in your work
- Apply each movement with the correct sign.
- Calculate the implied cycle change as −20 days.
- Identify that 54 days does not reconcile with the component movements.
A café cuts inventory days from 30 to 12 by holding less fresh food. Explain one cash benefit and two risks before recommending the change.
Give me a hint
Relate the lower stock balance to cash, then consider service and waste trade-offs.
Compare my reasoning
- Fewer inventory days may release cash tied up in stock and reduce spoilage.
- Stock-outs could limit menu choice or interrupt service during busy periods.
- Recommend testing demand forecasts and monitoring waste, stock-outs and sales rather than adopting a blanket minimum.
The change may release cash and reduce waste, but could cause stock-outs and lost sales. Test ordering levels and monitor service and waste outcomes.
Look for these in your work
- Identify a potential cash or waste benefit.
- Identify operational risks from too little stock.
- Make a conditional recommendation tied to monitoring.
Common mistakes
- Adding payables days instead of subtracting them
- Interpreting the cycle as an exact cash balance
- Recommending fewer inventory days without considering stock-outs
What can you explain now?
How does the appendix combine the three day ratios?
Compare with the explanation
Receivables days + inventory days − payables days
Payables days are subtracted because supplier credit delays the related cash payment.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the working capital cycle formula and give one reason a shorter cycle might not be an improvement.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.