This lesson explores the relationship between working capital and liquidity, examining how changes in its components affect the organisation’s cash position.

3.1 Defining Working Capital and the Cash Cycle
Working capital is the difference between a company’s current assets and current liabilities. It is the capital needed to fund day-to-day operations. The cash conversion cycle (CCC) measures the time it takes for a company to convert its investments in inventory and other resources into cash from sales. It is the time between paying for inventory and receiving cash from customers. The ACT syllabus requires candidates to “analyse the liquidity needs of the organisation by using the key stages of the working capital cycle” .

3.2 Key Components of the Cash Cycle
Managing the cycle involves understanding and optimising three components:

• Inventory Days: The average time a company holds inventory before selling it.

• Receivables Days (DSO): The average time it takes to collect cash from customers after a sale.

• Payables Days (DPO): The average time the company takes to pay its own suppliers.

The syllabus requires calculations of “receivables days, payables days and inventory days, and the impact of changing them on the organisation’s cash requirements” .

3.3 The Impact of Working Capital Changes
A change in any component of the working capital cycle directly impacts the company’s liquidity. For example, extending payment terms to customers (increasing DSO) will tie up cash, while delaying payments to suppliers (increasing DPO) will free up cash. The syllabus requires analysis of “the impact of working capital changes on the cash and liquidity position”