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Chapter 5. Working Capital and Cash Flow... > Broadening the Definition: Cash Vers...

Broadening the Definition: Cash Versus Working Capital

So far, we have discussed funds in terms of cash only. A broader and more useful way of looking at the availability of funds involves the concept of working capital.

How does your company create income? If you manufacture a product, you use funds to purchase inventory, produce goods with that inventory, convert those goods into accounts receivable by selling them, and convert accounts receivable into cash when you receive payment. If yours is a merchandising firm, the process is basically the same, although you probably purchase finished goods rather than producing them.


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