Release Working Capital
Working capital is a cheap source of fund which can help the company to expand their business if they can manage it properly. If we can manage them, they will generate cash flow which will be able to free our capital to invest in the new projects.
When we start the project, working capital is required to make the initial investment such as purchase fixed assets, new investments, or develop a new product. This working capital is tied up with the outstanding project. The company has to commit to the project before getting back the return and initial investment. When time went by, that investment will generate cash flow for the company. At the same time, they will require additional investment to operate such as accounts receivable, inventory, accounts payable, and other expenses.
These working capitals will be released when the project is completed. Most of the cash flow will be received in form of sales each year while other portions obtain from the sale of the project. The company will be able to collect back the cash and reinvest in somewhere else. It is called the release of working capital at the end of the project.
Release Working Capital Example
Company ABC has developed a new product line which will be last for 5 years. During the period, companies require to invest in raw material, worker wage, and other expenses. They also generate some cash flow through the sale of inventory too. At the end of each year, there will be some working capital stuck with this project. They will be released at the end of year 5 when the company stops producing, so they do not need to purchase any material and the production stop, and the finished goods will be sold. The company will be able to collect all the working capital which has been invested.