Working Capital Cycle

a) Define working capital.
-Working capital cycle is a firm’s current assets. Current assets are those that the firm’s expect to convert into cash within a year.

b) Explain the working capital cycle and illustrate your answer by using a diagram.
-The working capital cycle is measures the time between paying for goods supplied to you and the final receipt of cash to you from their sale. It is desirable to keep the cycle as short as possible as it increases the effectiveness of working capital cycle. The diagram below show how the working capital cycle works.

c) The table below gives information extracted from the annual accounts of Barbarella Sdn Bhd for the current year.

RM
Stock of raw materials
108,000
Stock of work in progress
75,600
Stock of finished goods
86,400
Purchases
518,400
Cost of goods sold
756,000
Sales
864,000
Receivables
172,800
Payables
86,400

Required:
i. Calculate the length of the working capital cycle for the current year.

Ram Material Inventory Turnover Period

WIP Inventory Turnover Period

Finished Goods Inventory Turnover Period

Receivables Collection Period

Payables Payment Period

Inventory Turnover Period Working Capital Cycle
=76.04+36.50+41.71 =154.25+73-60.83
=154.25 =166.42 Days
Receivables Collection Period
=73
Payables Payment Period
=60.83

ii. List THREE (3) possible actions that might be taken to reduce the length of the working capital cycle.
-Reduce raw materials turnover period and production cycle
-Increase creditor payment period
-Reduce debtor collection period

Reference