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Learning Objectives

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Learning Objectives

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Now · 1. Working Capital Basics

Learning Objectives

Manage cash conversion cycle
Optimize inventory, receivables, and payables
Understand short-term financing options

1. Working Capital Basics

Net Working Capital = Current Assets - Current Liabilities Cash Conversion Cycle = DIO + DSO - DPO

DIO (Days Inventory Outstanding)
DSO (Days Sales Outstanding)
DPO (Days Payables Outstanding)

2. Cash Management

Firms hold cash for: transactions, precautionary, speculative motives. Optimal cash balance: Baumol model, Miller-Orr model.

3. Inventory Management

EOQ (Economic Order Quantity):

EOQ = \sqrt{2DS/H}

D = annual demand, S = order cost, H = holding cost per unit

4. Receivables Management

Credit policy: terms, standards, collection. Trade-off: more sales vs. higher bad debt and financing costs.

Concept	Formula
Cash Conversion Cycle	DIO + DSO - DPO
EOQ	sqrt(2DS/H)
NWC	Current Assets - Current Liabilities

Q1: Inventory = $50k, COGS =$ 365k/day, DIO?

DIO = 50/(365/365) = 50 days Q2: What is the cash conversion cycle?

Time between paying for inventory and collecting cash from sales. = DIO + DSO - DPO. Q3: EOQ if D=10,000/yr, S= $50/order, H=$ 2/unit/yr?

EOQ = sqrt(2 x 10000 x 50 / 2) = sqrt(500,000) = 707 units Q4: Why do firms hold excess cash?

Precautionary motive (unexpected needs), transaction motive (day-to-day operations), compensating balances at banks. Join Discord PreviousValuation MethodsNextOptions & Real Options