This lesson establishes the foundational concepts of working capital, its components, and its importance to the organisation’s liquidity and financial health. The ACT syllabus defines working capital as the capital required to fund the day-to-day operations of a business and emphasises understanding its relevance to organisational success .

1.1 Defining Working Capital and the Working Capital Cycle

Working capital is the difference between a company’s current assets (e.g., cash, inventory, accounts receivable) and its current liabilities (e.g., accounts payable, short-term debt). The working capital cycle measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Key metrics include Days Payable Outstanding (DPO), Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and the cash conversion cycle (calculated as DSO + DIO – DPO) . The ACT syllabus requires the ability to analyse the liquidity needs of the organisation by using the key stages of the working capital cycle and to perform calculations of value and days .

1.2 Key Stakeholders and Competing Objectives

Effective working capital management requires balancing the competing objectives of different stakeholders. For example, operational companies (OpCos) may prioritise maintaining high inventory levels to meet customer demand, while treasury focuses on minimising cash tied up in inventory. The role of procurement in negotiating payment terms with suppliers is also critical .

1.3 The Role of Metrics and Benchmarks

Key metrics and benchmarks are essential for monitoring and improving working capital performance. The syllabus covers DPO, DSO, DIO, and the cash conversion cycle as percentages of sales, alongside the application of sector-specific benchmarks and the trade-offs involved in working capital decisions . Sensitivity analysis and an understanding of terms of trade and supply chain power dynamics are also important.