Learning Objectives:

  • Define working capital and its components.

  • Explain the cash conversion cycle.

  • Identify strategies for optimising working capital.

3.1 The Importance of Working Capital Management
Working capital management is a critical function of treasury, focused on managing the company’s short-term assets and liabilities to ensure operational efficiency and liquidity . The Vrije Universiteit Amsterdam curriculum emphasises “Working Capital and Cash Flow Management” as a core topic, covering the cash conversion cycle and its optimisation .

3.2 The Cash Conversion Cycle
The cash conversion cycle (CCC) measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It is calculated as Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payables Outstanding (DPO) . Optimising the cash conversion cycle helps reduce funding requirements and improve liquidity.

3.3 Working Capital Solutions
Various solutions are available to optimise working capital. Factoring involves selling receivables to a third party at a discount, while reverse factoring is a supply chain finance solution where the bank pays the supplier early at a lower cost . EuroFinance’s course also covers working capital and supply chain financing as key topics .

 

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