1. Net Working Capital (NWC) Objectives
Working capital management involves optimizing short-term current assets and current liabilities to ensure operational liquidity while preventing idle capital.

Net Working Capital = Current Assets − Current Liabilities
 
2. The Cash Conversion Cycle (CCC)
The CCC measures the exact timeline (in days) tracking cash from the initial purchase of raw materials until the collection of cash from customers:
CCC = DIO + DSO − DPO
  ┌─────────────────────── DIO ──────────────────────┐
  ▼                                                  ▼
  Raw Materials Purchased               Finished Goods Sold             Cash Collected
  ├───────────────────────────────────┼─────────────────────────────────┤
  ▲                                                                     ▲
  │                                                                     │
  └─────────── DPO ───────────► Cash Paid   └────────────── DSO ────────┘
                                ▲                                       ▲
                                │                                       │
                                └─────────────── CCC ───────────────────┘

Metrics Formulations
    • DIO = (Average Inventory / COGS) × 365
    • DSO = (Average Accounts Receivable / Total Credit Sales) × 365
    • DPO = (Average Accounts Payable / COGS or Cost of Purchases) × 365
  • Management Goal: Minimize the CCC without disrupting factory production or damaging customer relationships.

3. Working Capital Financing Strategies
  • Aggressive Approach: Funding seasonal and some permanent current assets with short-term, variable-rate debt. High risk of interest rate hikes but lower cost.
  • Conservative Approach: Funding all permanent assets and a portion of seasonal assets with long-term capital. Low liquidity risk but more expensive.

 
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