Necessitating enhanced working capital

The term “production” or “manufacturing cycle” refer to the time involved in the manufacture of goods. It covers the time span between the procurement of raw materials and the completion of the manufacturing process leading to the production of finished goods. Funds will have to be necessarily tied up during the process of manufacturing, necessitating enhanced working capital. In other words, there is some gap before raw material becomes finished goods. To sustain such activities the need for working capital is obvious. The longer the time – span the larger will be the funds tied up and, therefore, the larger the working capital needed and vice versa. There are enterprises which due to nature of the business will have a shorter operating cycle. A distillery, which has an ageing process, has generally to make a relatively heavy investment in inventory. The other extreme is provided by a bakery. The bakeries sell their products at shorter intervals and have a high inventory turnover. The investment in inventory and, consequently, working capital is not very large

Even within the same group of industries, the operating cycle may be different due to technological considerations. For economy in working capital, that process should be selected which has a shorter manufacturing process. Having selected a  particular process of manufacture, steps should be taken to ensure that the cycle is completed in the expected time. This underlines the need for effective organization and co-ordination at all levels of the enterprise. Appropriate policies concerning terms of credit for raw materials and other supplies can help in reducing working capital requirements. Often companies manufacturing heavy machinery and equipment minimize the investment from inventory or working capital by requiring advance payment from customers as work proceeds against orders. Thus, a part of the financial burden relating to the manufacturing cycle time is passed on to other.