Legal Definitions - circulating capital

Circulating capital refers to the portion of a business's assets that are continuously converted into cash or consumed in the normal course of operations, typically within a short period, often less than one year. It represents the fluid resources that keep a business running day-to-day, such as raw materials, inventory, accounts receivable (money owed by customers), and cash itself. This type of capital is distinct from fixed capital, which includes long-term assets like buildings, machinery, or land.

• Example 1: A Local Bakery

  A small bakery regularly purchases flour, sugar, eggs, and butter to make its products. These ingredients are quickly used up in the baking process, transformed into bread, cakes, and pastries (inventory), which are then sold to customers for cash. The cash received is then used to buy more ingredients. Here, the flour, sugar, eggs, butter, and the finished baked goods are all examples of circulating capital because they are constantly being acquired, consumed, and converted into sales revenue within a short cycle.

• Example 2: An Online Retailer

  An e-commerce business selling clothing maintains a stock of various apparel items in its warehouse. As customers place orders, these items are shipped out, and the company receives payment. The money earned is then used to purchase new inventory from suppliers. The clothing items held in the warehouse, the cash received from sales, and any payments due from customers who bought on credit (accounts receivable) all constitute circulating capital. They are continually moving through the business cycle, being bought, sold, and replenished to generate ongoing revenue.

• Example 3: A Construction Company

  A construction firm undertaking several building projects needs to regularly purchase materials like cement, steel, timber, and electrical wiring. These materials are used up as the buildings are constructed, and the company bills its clients for the work completed. The payments received from clients are then used to buy more materials and pay for short-term operational expenses. The construction materials on hand for current projects, the money owed by clients for completed work, and the cash reserves used for daily operations are all forms of circulating capital, as they are consumed and replenished in the short-term to keep the projects moving forward and the business operational.