Working Capital

Working capital is the money tied up in the day-to-day operations of an enterprise, such as purchasing raw materials, paying wages, processing, storing and selling output. In accounting terms, net working capital equals current assets minus current liabilities. In a seasonal food-processing enterprise, this requirement rises sharply around the harvest or procurement season and falls after processed goods are sold and payments are collected.

Components and operating cycle

Working capital finances the interval between cash paid for inputs and cash received from customers, called the operating cycle. Its size depends on how long procurement, processing, storage, sale and collection take.

• Current assets include cash, raw-material stocks, work-in-progress, finished goods and receivables.
• Current liabilities include short-term obligations such as trade payables, accrued expenses and short-term borrowings.
• Perishable inputs, refrigeration, quality control and storage can increase cash needs before sales revenue is realised.

Why seasonality matters

A processor may purchase a large share of its annual raw-material requirement during a short harvest period, while sales occur gradually. It therefore needs temporary or seasonal working capital above the minimum level required throughout the year.

• A concentrated procurement season creates a sudden demand for cash and inventory finance.
• The need remains high while produce is processed, stored or held as finished stock.
• Working capital is released when stocks are sold and receivables are collected.

Financing and management

Sound management matches finance with the duration of the requirement. The relatively stable minimum may be financed from long-term sources, while the seasonal peak may use short-term bank credit, trade credit or internal accruals.

• Too little working capital can interrupt procurement, processing and payments to suppliers.
• Excess working capital can leave funds idle and raise storage, interest, spoilage and obsolescence costs.
• Faster inventory turnover, timely collection and suitable supplier credit can shorten the cash-conversion cycle.