| The working capital cycle illustrates how cash flows | | | | needs to operate on a day-to-day basis. Working |
| into and out of a business. One cycle is defined by | | | | capital also refers to a business's current assets |
| the time between making a product to sell and | | | | minus its current liabilities. Current assets include |
| receiving payment for the product. Often, there are | | | | accounts receivables (money owed to the business) |
| extended periods of time between the different | | | | and inventory, and current liabilities include accounts |
| stages of the cycle. The working capital cycle also | | | | payable (money a business owes). Current liabilities |
| demonstrates how well a business manages its | | | | are also known as short-term debt, which can be |
| finances. | | | | bank loans and lines of credit with other companies. |
| The working capital cycle begins when a business | | | | When a business's liabilities outweigh its assets, the |
| purchases the materials needed to manufacture a | | | | business may be unable to meet necessary operating |
| product. The money to do so may come from the | | | | expenses, such as loans, rent, and inventory |
| owner's personal resources or from outside investors. | | | | purchases. |
| As a business manufactures a product, production | | | | Businesses that sell goods and services quickly and |
| costs, such as payroll, may be incurred. Creditors may | | | | operate almost entirely on a cash basis have little |
| also have to paid before the product is finished and | | | | need for large amounts of working capital. These |
| can be sold. If it takes a long time for a business to | | | | businesses can easily use the capital raised on a single |
| manufacture its products, it needs to ensure that it | | | | day to purchase additional inventory and increase |
| has enough capital available to fund its liabilities. The | | | | sales. However, companies that do not sell goods and |
| last step of the working capital cycle is selling the | | | | services quickly and that maintain many receivables |
| finished product to customers. Once payment is | | | | accounts, large amounts of working capital are vital |
| received for a business's goods, a new cycle begins. | | | | to business operation. |
| It is possible for several cycles to be in progress at | | | | Businesses in need of large sums of working capital |
| one time. | | | | can obtain funding from many different sources. |
| Many factors can effect the amount of cash | | | | Businesses who use large equipment can secure an |
| available in a working capital cycle. The most common | | | | equipment lease good for three to five years to |
| liabilities involved in a cycle are operational expenses | | | | save money. Leases also help advanced equipment, |
| and current debts to creditors. However, a business | | | | such as computers, from becoming obsolete. |
| may also have to pay taxes and rent on fixed | | | | Factoring is also available, and it allows businesses |
| assets, such as real estate. A business may also | | | | that process credit orders to sell their accounts |
| increase its cash flow if additional funding through | | | | receivables for immediate funding. Factoring is not |
| investors or creditors is obtained, assets are | | | | considered a loan; therefore, businesses are not |
| liquidated, or dividends from stocks are paid. | | | | burdened with more debt. |
| Working capital defined refers to the cash a business | | | | |