Purchasing and Financing 2024

Changes in working capital will impact a business’ cash flow. When working capital
increases, the effect on cash flow is negative. This is often caused by the liquidation of
inventory or the drawing of money from accounts that are due to be paid by the business.
On the other hand, a decrease in working capital translates into less money to settle
short-term debts.
3. THE CASH CYCLE
Students can describe the cash cycle and are able to distinguish between Income vs.
Cash Inflow and Expenses vs. Cash Outflow, as well as Financing vs. Investments.
Sometimes referred to as a cash conversion cycle, the cash cycle has to do with the
amount of time that passes between the purchase of raw materials for the creation of
goods and services and the receipt of payment for those products. A key factor in the idea
behind calculating the cash cycle is to understand the period of time when working capital
is not available for use in other purchases.
In a manufacturing process, the cash cycle begins with the acquisition of the materials
needed to produce finished goods. The cycle continues through the time required to
utilize the materials to create the products, package them, and deliver them to customers.
Once the client is invoiced for the delivered goods, the last step of the cash cycle begins. A
cash cycle is considered complete when the Accounts Receivable department receives and
posts payment in full on the invoice covering the delivered goods.
The duration of a cash cycle will vary, depending on several factors, including;
o The amount of time that is required to create the product
o The amount of time spent inspecting, packaging and shipping the finished product
o The amount of time that it takes for the client to remit payment for the finished
goods
A short cash cycle is the ideal situation, as it allows the company to take advantage of the
working capital sooner rather than later. Two ways to shorten a cash cycle are;
o To refine the manufacturing and shipping procedures
o To offer incentives to the customer to pay for the goods quickly
The activities of a company relate to the cash flow as follows:
o Goods are purchased and consequently there’s an outflow of money
o While the goods are combined in the production process, there’s no inflow of
money
o The finished goods must now be sold and waiting for the customer to pay takes
time so that the inflow of cash is delayed
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