Question

What is circulating capital ?

Hint:

Remember the cycle: {Cash \(\rightarrow\) Inventory \(\rightarrow\) Receivables \(\rightarrow\) Cash}. The capital that flows or 'circulates' through this cycle is the Circulating Capital.

Answer 1

Circulating Capital is another name for Working Capital. It refers to the capital in a business that is used in its day-to-day trading operations and is continuously converted from one form to another in a circular flow.
The name "circulating capital" comes from its movement through the Operating Cycle of a business:
It starts as Cash.
Cash is used to purchase Raw Materials (Inventory).
Raw materials are converted into Finished Goods (Inventory).
Finished goods are sold on credit, creating Accounts Receivable (Debtors).
Finally, cash is collected from the debtors, converting the accounts receivable back into Cash.
This cycle then repeats. Because the capital 'circulates' through these different forms of current assets, it is called circulating capital.
Essentially, it is the company's investment in short-term assets (cash, inventory, and receivables). The net circulating capital is the difference between current assets and current liabilities. Its primary purpose is to ensure the business has sufficient liquidity to meet its short-term obligations and fund its daily operational activities smoothly.