This lesson explores the relationship between working capital and cash flow, and how a company’s operating cycle affects its liquidity position.

3.1 Importance of Working Capital Management
Working capital management is a key function of the finance manager. It is concerned with managing cash flows into, within, and out of the firm . Effective management enhances liquidity and profitability while balancing risk .

3.2 Key Components
The cash conversion cycle, comprising inventory days, receivables days, and payables days, measures the time it takes for a company to convert its investments in inventory into cash from sales. Optimisation techniques involve improving collections, managing disbursements, and accelerating inventory turnover .

3.3 Techniques for Optimisation
Strategies to enhance working capital include improving billing and collection processes, negotiating favourable payment terms with suppliers, and managing inventory levels to reduce holding costs