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Working capital cycle

Author: Jim Riley  Last updated: Sunday 23 September, 2012

The working capital cycle

As an introduction to the working capital cycle, here is a quick reminder of the main types of cash inflow and outflow in a typical business:



Cash sales to customers

Purchasing finished goods for re-sale

Receipts from customers who were allowed to buy on credit (trade debtors)

Purchasing raw materials and other components needed for the manufacturing of the final product

Interest on bank and other balances

Paying salaries and wages and other operating expenses

Proceeds from sale of fixed assets

Purchasing fixed assets

Investment by shareholders

Paying the interest on, or repayment of loans


Paying taxes

Cash flow can be described as a cycle:

  • The business uses cash to acquire resources (assets such as stocks)
  • The resources are put to work and goods and services produced. These are then sold to customers
  • Some customers pay in cash (great), but others ask for time to pay. Eventually they pay and these funds are used to settle any liabilities of the business (e.g. pay suppliers)
  • And so the cycle repeats

Hopefully, each time through the cash flow cycle, a little more money is put back into the business than flows out. But not necessarily, and if management don’t carefully monitor cash flow and take corrective action when necessary, a business may find itself sinking into trouble.

The cash needed to make the cycle above work effectively is known as working capital.

Working capital is the cash needed to pay for the day to day operations of the business. 

In other words, working capital is needed by the business to:

  • Pay suppliers and other creditors
  • Pay employees
  • Pay for stocks
  • Allow for customers who are allowed to buy now, but pay later (so-called “trade debtors”)

What is crucially important, therefore, is that a business actively manages working capital. It is the timing of cash flows which can be vital to the success, or otherwise, of the business. Just because a business is making a profit does not necessarily mean that there is cash coming into and out of the business.

There are many advantages to a business that actively manages its cash flow:

  • It knows where its cash is tied up, spotting potential bottlenecks and acting to reduce their impact
  • It can plan ahead with more confidence. Management are in better control of the business and can make informed decisions for future development and expansion
  • It can reduce its dependence on the bank and save interest charges
  • It can identify surpluses which can be invested to earn interest

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Creating & Protecting Business Ideas
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Market Research for a Startup
Locating the Startup Business
Choosing a Legal Structure for a Startup
Employing People in a Startup
Generating and Protecting a Business Idea
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Breakeven Basics
Costs, Revenues and Profits
Business Costs
Using Budgets
Using Breakeven in Decision-Making
Investment Appraisal Basics
Financial Strategies
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Working Capital
Balance Sheet
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Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios


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Place (Distribution)
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Business Organisation

Basics of Business Growth
Business Activities
Legal Structure Basics
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Generating and Protecting a Business Idea
Organisational Structures


Working in Teams
Communication Basics
Communication Methods
Workforce Planning
Recruitment, Selection & Training
Employee Motivation
Organisational Structures


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Critical Path Analysis
Scale and Resource Mix
Lean Production
Capacity Management
Customer Service Basics
Managing Quality
Operational Decision-making
Using Technology in Operations
Working with Suppliers

Economic Environment

Economic Sectors
Government Spending & Taxation
Interest Rates & Monetary Policy

Business Strategy

Leadership styles
Business Culture
Change Management

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