Green working capital cycle from cash to collection

Managing your working capital

Article by Drew Coles a member of the chartered institute of Management Accountants

Working capital is the amount of funds invested in the entire cycle from purchasing raw materials, through operating cycles to the delivery and eventual receipt from the customer. The management of this cycle is vital to the healthy cashflow and viability of the business. In summary a healthy working capital cycle is required to ensure it can carry out its operations.


First up in the working capital cycle the business must have sufficient cash to invest in raw material stocks and other operational requirements such as tooling to complete its operational cycle. It is worth noting the company may not receive a return on this investment for several months therefore a good cash flow forecast is necessary to highlight periods of low cash and to ensure financing is planned.
GBP cash in coins and notes at start of working capital cycle

Raw material stocks

The first purchase in the working capital cycle is usually material stocks in for example manufacturing or in terms of retail stock of finished products. Material stock investments should be planned as there are several variables to consider such as bulk discounts if larger funds are freely available, the expected time which the raw material will be in stock (The longer time in stock the longer it will take to get a return), the type of inventory system implemented in the company such as Just in time. These factors should be analysed before the investment is made. For instance, it may not be possible to run a just in time operating system because regular deliveries cannot take place from suppliers or the funds may not be available to invest in sufficient stock to attract bulk discounts.

Managing Finished stock

The management of finished stock should also be analysed. The faster finished stock is shipped to the customer and invoiced the less time the business will have to wait to receive a receipt. A just in time system can also be used for finish stock whereby operations will only start to create products when the order is received meaning as soon as the product is made it is shipped straight to the customer. This will decrease the working capital cycle time and increase cashflow.

Inventory in working capital cycle

Inventory stock in working capital cycle
Inventory through a tablet

Managing debtors and creditors

Once the customer is invoice they will be expressed as a current debtor on the balance sheet. Management of these customer balances is hugely important. Firstly, a decision needs to be made as to the length of customer credit. The standard credit terms for business is usually 30days however these terms can be shortened to improve cashflow or extended to attract new business. There needs to be a balance between the above variables to have an effective working capital cycle. Secondly, an effective collection function needs to be established to ensure customers pay on time and to chase outstanding debts. This function will include sending customer statements, making telephone calls, emails and letters to ensure debts are collected on behalf of the business.
Creditors and Debtors on folders in working capital cycle

Other notes

It is worth noting the quicker the working capital cycle the faster the business will receive its money from customers and improve its cashflow. This is sometimes referred to as throughput and businesses aim to reduce their throughput and eradicate bottlenecks in the operational cycle to help improve the working capital cycle.

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