Cash Flow and Working Capital

This lesson covers AQA A-Level Business topic 3.5.2 — analysing financial performance through the management of cash flow and working capital. You will learn about the cash flow cycle, the role of receivables and payables, and the principles of working capital management.

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The Cash Flow Cycle

Key Definition: The cash flow cycle (also called the cash conversion cycle or working capital cycle) is the length of time between a business paying for its raw materials and receiving cash from the sale of the finished product.

The shorter the cash flow cycle, the less time the business's cash is tied up, and the less external finance it needs.

Stages of the Cash Flow Cycle

1. Purchase raw materials — cash outflow (or creation of a trade payable).
2. Production — raw materials are converted into finished goods (cash is tied up in work-in-progress and finished goods inventory).
3. Sale — goods are sold (but if sold on credit, cash is not received immediately — a trade receivable is created).
4. Cash received — the customer pays, completing the cycle.