The working capital cycle of a company generally includes the following three operations:

• Purchasing Inventory (operating items): This involves procuring goods, raw materials, and consumable supplies. These purchases can be made either in cash or on credit, requiring the company to finance at least a portion of these acquisitions.
• Manufacturing Process (for industrial or artisanal businesses): This involves transforming raw materials into finished products for sale. The process generates various expenses (electricity, phone, fuel, maintenance, handling, etc.) that require immediate or deferred disbursements.
• Receivables from the Sale of Finished Products or Services: These represent the delivery of products to customers in exchange for payments. Customers do not always pay in cash, which can lead to payment delays. Therefore, the company must be able to finance new supplies while waiting for the receivables to be collected.

These three operations linked to the working capital cycle highlight the need for the company to secure financing not only for fixed asset investments but also for the working capital cycle, referred to as the working capital requirements (WCR).

If one wishes to maintain a cash reserve as a measure of financial security from the first year, the net working capital (NWC) can be used instead of the WCR. Indeed, working capital represents the excess of long-term resources after financing long-term investments.

In other words, when embarking on an investment project, long-term financing sources are primarily used. These resources will first be allocated to finance fixed asset needs.

The remaining resources after this operation are called net working capital. They will be used to finance, partially or entirely, depending on the needs, the working capital cycle as well as other expenses for the first months of operation.

It is clear that net working capital (NWC) encompasses both the working capital requirement (WCR) and net cash (NC). Thus, mathematically, NWC = WCR + NC…

This text is an excerpt from the book “Technical Procedures for Developing Investment Projects” written by FLAVIEN TUMBULA KIAMU.

We invite you to read the following article, “FINANCING THROUGH EXTERNAL FUNDS.“

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