Every business has a rhythm: money goes out for stock, materials and wages, then (hopefully) comes back in from customers. The gap between those two moments is your working capital cycle, and understanding it is one of the most useful things an owner can do. Once you can measure it, you can shorten it, and a shorter cycle means more cash in the bank, less stress and more freedom to say yes to growth. This guide explains the working capital cycle in plain English, walks through a worked example, and shows the levers you can pull.
What is the working capital cycle?
The working capital cycle is the number of days between paying out cash to run your business and receiving cash back from customers. It’s also called the cash conversion cycle.
It has three parts:
- Stock days (days inventory outstanding): how long stock or materials sit before they’re sold or used.
- Debtor days (days sales outstanding): how long customers take to pay you after a sale.
- Supplier days (days payables outstanding): how long you take to pay your suppliers.
The formula:
Working capital cycle = stock days + debtor days − supplier days
Supplier days are subtracted because every day your supplier waits is a day their money, not yours, is funding your business.
How do I calculate my working capital cycle?
You’ll need your latest annual (or annualised) figures from your accounting software. Here’s the step-by-step method.
- Stock days = (average stock value ÷ annual cost of goods sold) × 365
- Debtor days = (average trade debtors ÷ annual sales) × 365
- Supplier days = (average trade creditors ÷ annual cost of goods sold) × 365
- Cycle = stock days + debtor days − supplier days
If you don’t hold stock (a consultancy, for example), stock days are zero, but you may have “work in progress” days instead, which are the days of unbilled work. Treat them the same way.
A worked example: the Brisbane homewares wholesaler
Example scenario — illustrative only. A Brisbane homewares wholesaler sells to independent retailers on 30-day terms. Its figures for the year look like this.
| Measure | Figure |
|---|---|
| Annual sales | $2,400,000 |
| Annual cost of goods sold | $1,460,000 (about $4,000 a day) |
| Average stock on hand | $240,000 |
| Average trade debtors | $296,000 |
| Average trade creditors | $120,000 |
Now the calculation:
| Component | Calculation | Days |
|---|---|---|
| Stock days | $240,000 ÷ $1,460,000 × 365 | 60 |
| Debtor days | $296,000 ÷ $2,400,000 × 365 | 45 |
| Supplier days | $120,000 ÷ $1,460,000 × 365 | 30 |
| Working capital cycle | 60 + 45 − 30 | 75 days |
What does 75 days mean in dollars? Add up what’s tied up: $240,000 of stock plus $296,000 owed by customers, minus the $120,000 the business owes suppliers. That’s about $416,000 of the business’s own money locked in the cycle at any time, sitting on shelves and in customers’ accounts.
Notice something else: the terms say 30 days, but customers are actually taking 45. At about $6,600 of sales a day, that 15-day gap alone leaves close to $100,000 sitting with customers.
What happens when the business grows?
Here’s where the cycle really bites. Say the wholesaler lands a new chain of stores and sales grow by a third. If the cycle stays at 75 days, the cash tied up grows by a third too, to roughly $555,000. The business is more profitable on paper but needs close to $140,000 more working capital just to keep up with its own success.
That’s why the Reserve Bank’s research on small businesses keeps coming back to cash flow: profitable businesses can still feel stretched when growth runs ahead of cash. It’s not a sign something is wrong. It’s a sign you need a plan for the gap.
What are the levers to shorten the cycle?
Each part of the formula has its own levers. Some cost nothing; others use finance to buy time.
| Lever | What to try | Effect on cycle |
|---|---|---|
| Reduce stock days | Order more often in smaller batches; clear slow lines; track best sellers; agree faster supplier delivery | Fewer days cash sits on shelves |
| Reduce debtor days | Invoice the day work is delivered; add a pay-now link; send reminders at 7 days and on the due date; make terms clear upfront | Cash arrives sooner |
| Use invoice finance | Release up to 85% of an invoice’s value soon after issuing it, rather than waiting for the customer | Debtor wait shrinks dramatically |
| Increase supplier days (fairly) | Negotiate terms that match your debtor days; use them fully, but always pay on time | Suppliers fund more of the cycle |
| Keep a revolving buffer | A line of credit covers the gap on busy months and is repaid as customers pay | Smooths the cycle without a fixed lump sum |
A word on supplier days: stretching suppliers past agreed terms isn’t a lever, it’s a relationship risk. The aim is fair terms that line up with how your customers pay you.
Let’s run the levers on our example
Suppose the wholesaler takes three practical steps:
- Moves to fortnightly ordering on its top 50 lines and clears slow stock: stock days fall from 60 to 45.
- Invoices on dispatch with a payment link and structured reminders: debtor days fall from 45 to 35.
- Negotiates 45-day terms with its two biggest suppliers: supplier days rise from 30 to 40.
| Before | After | |
|---|---|---|
| Stock days | 60 | 45 |
| Debtor days | 45 | 35 |
| Supplier days | 30 | 40 |
| Cycle | 75 days | 40 days |
| Cash tied up (stock + debtors − creditors) | about $416,000 | about $250,000 |
That’s around $165,000 freed up without borrowing a cent, simply by running the cycle more tightly. Finance then becomes a growth tool rather than a patch.
Where does finance fit in the working capital cycle?
Once your cycle is running well, finance can help you move faster than your cash alone allows. The trick is matching the product to the part of the cycle you’re funding.
| The gap | Best fit | Why |
|---|---|---|
| Waiting on B2B invoices | Invoice finance | Unlocks up to 85% of invoice value; grows with your sales |
| Month-to-month ups and downs | Business line of credit | Draw, repay, draw again; $10k–$250k limits |
| A big stock order for a new contract or season | Small business loan | Lump sum from $5k–$500k; same-day funding possible |
| Card-based takings with uneven trade | Merchant cash advance | Repayments flex with your card and EFTPOS sales |
For a deeper look at the product side, see our working capital loans page, or read how invoice finance works for the step-by-step mechanics.
Your five-minute working capital check
- I know my stock days, debtor days and supplier days.
- My customers’ actual payment time is close to my stated terms.
- My supplier terms roughly match how long customers take to pay me.
- I’ve estimated how much extra cash my next growth step will tie up.
- I have a plan (cash, invoice finance or a line of credit) to cover that gap.
If you can tick all five, you’re managing working capital better than most. If growth is coming and the numbers show a gap, that’s exactly the moment easy access to capital pays off. Make a 60-second enquiry and a lending specialist will help you match the right product to your cycle, priced on your business’s situation with the sharpest option available.
Questions we get asked
What is a good working capital cycle?
There's no single right number because it depends on your industry. A cafe paid by card on the day can have a very short or even negative cycle, while a manufacturer holding raw materials and waiting on trade customers might run 60 to 90 days or more. The useful comparison is your own cycle over time.
Why does growth make cash flow tighter?
Because you usually pay for the extra stock, materials and wages before the extra customers pay you. The longer your cycle, the more cash each new dollar of sales ties up. That's why fast-growing businesses can be profitable and still feel short of cash.
Is the working capital cycle the same as the cash conversion cycle?
Yes, in everyday use the two terms mean the same thing: the number of days cash is tied up in running the business. Accountants sometimes call it the operating cycle or cash-to-cash cycle too.
Which is the easiest lever to pull first?
For most businesses it's debtor days. Invoicing on the day the job finishes, offering easy payment options and following up promptly can cut days quickly without costing anything. Invoice finance can shorten the effective wait even further.
Should I use a loan to fund a long working capital cycle?
Finance works best when it bridges a gap that closes, such as waiting on invoices or buying stock ahead of a busy season. If the cycle is long because of slow-moving stock or a customer who never pays, fix that first, then use finance to support healthy growth.