Working Capital Management
The cash conversion cycle
Working capital management balances liquidity against profitability. The cash conversion cycle (CCC) equals days inventory outstanding (DIO) plus days sales outstanding (DSO) minus days payables outstanding (DPO). A shorter CCC frees cash; a negative CCC means suppliers effectively fund operations. Know operating working capital (current assets minus current liabilities, often excluding cash and debt), net working capital, aging schedules, collection effectiveness, and trade credit terms. Levers include inventory reduction, tighter credit and collections, dynamic discounting, supply chain finance, and payment term extension, but stretching payables can raise supply risk and damage supplier relationships.
Traps
Use consistent denominators: DIO and DPO often use COGS, while DSO uses revenue, and use the same day count (365 versus 360). DSO can be calculated from average or ending receivables; ending balances can distort seasonality. A discount's annualized cost is not the discount percentage. Extending DPO by 10 days does not release revenue-sized cash; it releases roughly 10 days of purchases or COGS. A lower CCC is not always better if it harms sales.
Worked example
DIO 45 plus DSO 60 minus DPO 30 gives a CCC of 75 days. Extending DPO to 40 lowers CCC to 65 days. With annual revenue of $365 million, one day of revenue is $1 million, so a 10-day CCC reduction is roughly $10 million of cash, although the payables leg strictly relates to purchases. Discount check: 2/10 net 30 costs 2/98 times 365/20, or about 37.2% annualized; borrow to take the discount only if the borrowing rate is lower.