Working capital cycle
Working capital refers to the money that is required by the business in order to fund the day to day operations of its operations. It is useful in facilitating smooth running of the business as well as helping in generating more revenue for the business. Thus, debts and expenses can be paid when they fall due. The working capital cycle is the time taken between purchase of inventory and its components and the sale of such inventory (Smith, 1979). This cycle facilitates the effectiveness of the business working capital. The phases of working capital cycle include purchase of inventory, payments to account payables and receiving money from the accounts receivables. It also includes the cash itself. Therefore, the working capital cycle involves the phases of purchasing goods, storing, selling and waiting for the payments for goods (Lorenzo & Virginia, 2010).
Primary sources of short term funds
The primary sources of short term finance include trade credit, advances from customers, loans from financial institutions and commercial papers. Trade credit involves taking loans in the form of goods. Therefore, a business obtains goods, sell the goods and then pay for them at a later date, thus, an enterprise is able to meet the needs of the customers by purchasing goods for resale on credit. Advances from customers involve the customers paying for the goods fully or partially in advance as a confirmation of orders. Such funds can be utilized in the business to meet its operating expenses. Businesses can also obtain funds through sale of its securities and commercial papers. Finally, the business can obtain short term loans from financial institution such as banks as well as savings and credit cooperative societies. Such short term loans form primary sources of finances for the business.
Float
The term float is normally used with regards to cash held by the business. It refers to the amount of money that is held by the business in liquid form. The cash float held by a business represents the ready cash available in the business cash till for making day to day payments of the business. Cash float also ensures that sufficient change is available for the day’s customers (Smith, 1979). A business is expected to hold some amount of money in ready cash. However, the amount of float differs from one business to another, depending on the size of the business and the number of transactions handled. The term float may have different meanings, depending on where it is used. For example, it represents the amount given to the petty cashier to enable him/her meet petty payments that he/she handles.
Investment options for idle cash
Effective cash management of a business may result into idle cash. Such cash can be invested in short term investment opportunities available. It can also be re-invested in producing more goods and services, which will enable to the business to generate more cash and earn larger profits (Kim, 1996). Idle cash can also be invested in the money market. The money market investments usually earn large interests, especially if invested in government securities. The idle cash can also be invested in the stock market to enable the business earn capital gains on the stocks held. Money is held in the form of stock for speculative motives so that when the stock prices rise, the stocks are sold. Debt repayment can also be financed by the idle cash to reduce the burden of accumulating interest expenses on the debts.
References
Kim, Y. (1996). Advances in Working Capital Management. New York, NY: Emerald Group Publishing Limited.
Lorenzo, P. & Virginia, S. (2010). Working Capital Management: Financial Management Association Survey. Oxford: Oxford University Press.
Smith, V. (1979). Guide to Working Capital Management. Oxford: McGraw-Hill Publishers.