How Do I Handle Receivables & Loans to Enhance Cash Flow Into the Working Capital Cycle?

Working capital cycle shows how cash transforms into sales.

Working capital is the amount of current assets compared with current liabilities. The working capital cycle shows you how the money flows in the business. The basic cycle is: Cash goes to buy materials, then the company produces materials. Next, the goods become finished and finally sold. This goes to cash, which then starts the cycle over again. Companies try to make this cycle as quick as possible so they can realize their profits faster.

Instructions

1. Place receivables on the cash inflow portion of the working capital cycle. Because working capital equals current assets minus current liabilities, you can classify any receivable you will collect in the next year as a current asset. This increases your working capital.

2. Use loans as a way to increase cash in to purchase inventory. Loans will only partially affect working capital. Most loans are due partially in the next year and then the rest over several years. You will need to separate the current portion of the loan from the noncurrent portion. The current portion is a current liability and affects working capital, while the noncurrent portion is a noncurrent liability and has no effect on working capital. The loan will decrease your working capital by the amount of the current portion of debt, but also increases working capital from the cash you receive from your loan.

3. Place receivables on the right side of the working capital diagram if you are diagramming the situation. Place the loan amount on the left side of the working capital diagram.

References

• Tutur 2 U: Working Capital
• Investopedia: Working Capital Definition