A LevelAccountingCambridge (CIE)Revision NotesFinancial AccountingAnalysis & Communication of Accounting InformationOther Ratios

Other Ratios (Cambridge (CIE) A Level Accounting): Revision Note

Exam code: 9706

Written by: Dan Finlay

Reviewed by: Lucy Kirkham

Updated on 8 April 2026

Working capital cycle

What is the working capital cycle?

What is the formula?	$Trade receivables turnover (days) + inventory turnover (days) - trade payables turnover (days)$
How should the value be written?	Write as the number of days (X days)
How should the value be rounded?	Each ratio is rounded up to the next whole day
What does the value mean?	The value represents the time it takes a business to convert its net working assets into cash

You need to remember the formulas for the efficiency ratios
- Trade receivables turnover
  - $\frac{Trade receivables}{Credit sales} \times 365$
- Inventory turnover
  - $\frac{Average inventory}{Cost of sales} \times 365$
- Trade payables turnover
  - $\frac{Trade payables}{Credit purchases} \times 365$

How do I interpret the value?

If the working capital cycle is shorter
- The cash is tied up in assets for less time
- This means it is more efficient and results in better liquidity
If the working capital cycle is longer
- There might be a need for additional financing to fund the working capital
- There is a greater risk of cash flow problems

The working capital cycle can be negative
- For example, retail businesses sell goods for cash before paying suppliers
Manufacturing businesses have a higher working capital cycle because the cycle starts when the raw material is purchased

How can the working capital cycle be improved?

Reduce the amount of inventory that the business holds
- However, low inventory risks lost sales if the goods are unavailable when needed by customers
Collect money from customers quicker
- However, giving customers tighter credit terms could cause them to use a different supplier
Pay suppliers later
- However, this could damage supplier relationships or result in late payment penalties

Worked Example

Omatola runs a small business by herself. She provides the following information for the year ended 29 February 2024.

	$
Sales	40 000
Purchases	25 000
Inventory at 1 March 2023	7 000
Inventory at 29 February 2024	9 000
Trade receivables	11 000
Trade payables	4 000

All sales and purchases were made on a credit basis.

Calculate the working capital cycle at 29 February 2024. Round up your answer to the next whole day.

Answer:

Calculate the average inventory
- $\frac{Opening inventory + Closing inventory}{2}$

$\frac{$ 7 000 + $ 9 000}{2} = $ 8 000$

Calculate the cost of sales
- Opening inventory + Purchases - Closing inventory

$7 000 + $25 000 - $9 000 = $23 000

Calculate the required ratios

Ratio		Days
Trade receivables turnover	$\frac{11 000}{40 000} \times 365 = 100.375$	101
Inventory turnover	$\frac{8 000}{23 000} \times 365 = 126.95 . . .$	127
Trade payables turnover	$\frac{4 000}{25 000} \times 365 = 58.4$	59

Calculate the working capital cycle
- $Trade receivables turnover (days) + inventory turnover (days) - trade payables turnover (days)$

$101 + 127 - 59 = 169$

169 days

Net working assets to revenue (sales)

What is the net working assets to revenue ratio?

What is the formula?	$\frac{Net working assets}{Revenue (sales)} \times 100$ where $Net working assets = inventories + trade receivables - trade payables$
How should the value be written?	Write as a percentage (X%)
How should the value be rounded?	Round to two decimal places
What does the value mean?	The value represents how much working capital is needed to generate each dollar of revenue

The ratio measures how efficiently a business uses its net current assets (excluding cash) relative to its sales
- A lower percentage is more efficient because less working capital is needed per dollar of revenue
- A higher percentage suggests that more working capital is tied up relative to sales

Examiner Tips and Tricks

Actions to improve the net working assets to revenue ratio also improve the working capital cycle.

Should I use the year end or average figures?

The question will tell you which figures to use
Average figures tend to be more representative of the performance
- Sales take place during the year, not just at the end
However, averages can distort the perception because changes do not take place evenly throughout the year
The business needs to be consistent
- If they used the year end figures, then they should continue using year end figures in subsequent years

Worked Example

Omatola runs a small business by herself. She provides the following information for the year ended 29 February 2024.

	$
Sales	40 000
Purchases	25 000
Inventory at 1 March 2023	7 000
Inventory at 29 February 2024	9 000
Trade receivables	11 000
Trade payables	4 000

All sales and purchases were made on a credit basis.

Calculate the net working assets to revenue ratio for 29 February 2024 using year end balances.

Answer:

Calculate the net working assets

$9 000 + $11 000 - $4 000 = $16 000

Calculate the net working assets to revenue ratio
- $\frac{Net working assets}{Revenue (sales)} \times 100$

$\frac{16 000}{40 000} \times 100 = 40 %$

40%

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Other Ratios (Cambridge (CIE) A Level Accounting): Revision Note

Working capital cycle

What is the working capital cycle?

How do I interpret the value?

How can the working capital cycle be improved?

Worked Example

Net working assets to revenue (sales)

What is the net working assets to revenue ratio?

Examiner Tips and Tricks

Should I use the year end or average figures?

Worked Example

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

Author: Dan Finlay

Reviewer: Lucy Kirkham