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Finance for Non-Financial Managers
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the ordinary, the kind of 40- to 50-day payment patterns that
most companies see today. And sales continued to grow,
increasing by $50,000 every month, with no decline in margins
and no serious competition. Profits climbed without a pause.
The owners didn’t have to build much of an inventory, because
everyone wanted the same single product, so they just made
them and shipped them as fast as they could. This was a busi-
ness your mother would love!
Yet a strange thing happened on the way to the bank. The
owners were suddenly shocked to find that they didn’t have
enough cash to pay their bills. They soon found they couldn’t
buy more materials to make more Widgets, then they couldn’t
make payroll, and finally creditors went to court and nearly had
the company closed down. Instantly profitable Wonder Widget
was insolvent six months after they opened the doors!
Now, I hope you would ask, how could that happen? Good
question. Let’s try to answer it.
To do that, we need to look at how cash typically flows
through a company. We’ll again use Wonder Widget as our
example.

The Cash Flow Cycle
At the beginning of the cash cycle, nearly every business starts
with—you guessed it!—cash. But from that point on, the central
purpose of the business is
to convert that cash into
Cash cycle In general,
other kinds of assets, to
the time between cash
disbursement and cash leverage or extend it with
collection. In manufacturing, this cycle liabilities, and to ultimately
would consist of converting cash into turn it back into cash
raw materials, raw materials into fin- again, but more cash than
ished goods, finished goods into the business started with.
receivables, and receivables back into
This process continues
cash.Also known as cash flow cycle,
indefinitely and simultane-
cash conversion cycle, and operating
ously throughout the entire
cycle.
existence of a business.