Working Capital, Liquidity and Treasury Management
Working capital and treasury
This domain tests the management of inventory, receivables, payables, cash and liquidity, and the role of the treasury function.
Core rules
- The cash conversion cycle = inventory days + receivable days - payable days; a shorter cycle releases cash.
- EOQ = square root of (2DO/H), balancing order cost and holding cost.
- Miller-Orr sets a cash range with upper and lower limits; Baumol is the cash analogue of EOQ.
- Credit policy compares the contribution from extra sales with the cost of extra receivables and bad debts.
- Treasury manages liquidity, funding, FX and interest-rate exposure, and counterparty risk.
Worked example
Inventory LKR 500,000, COGS LKR 3.65m, receivables LKR 600,000, sales LKR 5.475m, payables LKR 365,000. Inventory days = 500/3,650 times 365 = 50; receivable days = 600/5,475 times 365 = 40; payable days = 365/3,650 times 365 = 36.5, say 37. CCC = 50 + 40 - 37 = 53 days. If receivables are collected 10 days faster, roughly LKR 150,000 of cash is released (10/365 times 5.475m), improving liquidity without new borrowing.
Traps
Do not use sales instead of COGS for inventory and payables; do not ignore seasonal peaks; do not minimise cash at the expense of liquidity; and do not treat factoring as free, because it carries fees and may signal distress.