In one sentenceThe number of days between paying the supplier and collecting from the customer, equal to the inventory period plus the collection period minus the payment period.
Simply put
Imagine a riyal that left you to buy goods: it stays in the warehouse for a while, then it is sold on credit and stays with the customer for a while, then it comes back to you. The supplier gave you a grace period before you pay him. The difference between the whole journey and the supplier's grace period is the period you finance yourself.
The shorter the cycle, the less cash you need to run the same business. You shorten it in three ways: sell inventory faster, collect faster, or get a longer grace period from suppliers.
Worked example
A distribution business keeps its goods in the warehouse for 90 days, collects from its customers after 60 days, and pays its suppliers after 50 days.
Inventory period90 days
+ Collection period60 days
− Payment period50 days
Cycle = 90 + 60 − 50100 days
Formula: Inventory period + collection period − payment period
Don't confuse it with
Working capitalWorking capital is an amount on a specific date, and the cycle is a period of time that explains why the business needs that amount.