BUSF_A01.qxd

The dynamics of working capital

Figure 13.1

The working

capital cycle for

a manufacturing

business

Each of the boxes in the upper part of the diagram can be seen as a tank through which

funds flow. These tanks, which are concerned with day-to-day activities, have funds

constantly flowing into and out of them.

managers should take on the amounts to be held in each tank at any given time. Here

managers need to attempt to balance the costs involved with maintaining funds in the

tanks, with the risks involved with having the tanks too full or too empty.

Note that the upper portion of Figure 13.1 would, with minor amendment, apply

equally well to non-manufacturing businesses. For example, a retailer would not have

raw materials inventories or WIP. A service business would have inventories of nei-

ther raw materials nor finished goods, but may well have WIP. The figure takes a man-

ufacturer as the example simply because manufacturers tend to have all elements of

working capital.

The link between working capital and long-term investment

and financing

Working capital is clearly not the only aspect of the business that impacts on cash.

The business will have to make payments to government, both central and local, for

taxation. Non-current (fixed) assets will be purchased and sold. Lessors of non-current

assets will be paid their rent (lease payment). Shareholders (existing or new) may

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