Scenario Analysis No. 7 – What you need to know about “Working Capital” and “Cash Management”?

When a business conducts its transactions purely on credit terms, be it for sales or for purchases, there will inevitably be inventories, receivables and/or payables. This in line with the flows in the normal business cycle.


Working Capital, effectively means the cash that must be made available to pay off suppliers, which would usually come from cash received from customers. Hence, Working Capital is inventories plus receivables less payables; or more comprehensively defined as:

Current Assets – Current Liabilities

A positive difference indicate that the business has the ability to settle its short-term liabilities. However, if at a specific point in time there is not enough cash to pay the supplier where inventories have not been sold and customers have not paid-up yet, then the business may have to look at additional capital from other sources to fund the payment to the supplier. This is while waiting for the cash to be received from customer.

In short, good Cash Management is critical for business to monitor its Working Capital. Especially, where the balances for inventories and/or customers are unusually high. The timing of expected cash collected and expected cash pay-out need to be identified and forecasted clearly.

As a start, it is better for business to have shorter credit terms for customers (e.g. 30 days) compared to credit terms from suppliers (e.g. 45 days). Ideally, cash received from customer must be timed to be received before payment is made to supplier. GNZ


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