The cash operating cycle is made up of four (4) major phases.

These are explained by the slides that follow.

Phase 1: Purchase of Raw-materials

• The chain starts with the firm buying raw materials on credit.

• In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firm’s work in progress (WIP).

Phase 2: Work-in-Progress

• Work will continue on the WIP until it eventually emerges as the finished product.

• As production progresses, labour costs and overheads will need to be incurred, of course at some stage trade creditors will need to be paid as well.

Phase 3: Finished Goods

• When the finished goods are sold on credit, debtors are increased.

Phase 4: Debtors

• When debtors eventually pay, cash will be injected back into the firm.

Each of the stages – stocks (raw materials, work in progress and finished goods), trade debtors, cash (positive or negative) and trade creditors – can be viewed as tanks into and from which funds flow.

Determining the Cash Cycle

The cash operating cycle in a manufacturing business equals;