M34ManageFinance· Module 3
Working Capital
Growth consumes cash faster than profit replaces it. The more you sell, the tighter it gets.
- Grow
- Fix
- Manage
- Finance
- Operations
- ~5 min · Calculation
The business problem
Every sale on credit, every item in stock and every early supplier payment ties up cash. As a business grows, its working capital requirement grows with it. Without management, growth can become a cash crisis.
Why it matters
The cash conversion cycle determines how much funding growth requires. Shortening it releases cash from within the business — often more cheaply than any loan.
What you will learn
- Calculate the cash conversion cycle
- Understand how each component affects cash
- Estimate the working capital needed for growth
- Choose actions to shorten the cycle
Core questions
- How many days does it take for a shilling spent on stock to return as cash?
- Which component — stock, receivables or payables — is worst?
- How much cash will our growth plan need?
- Which action would release the most cash soonest?
Work through the module
CaseWhat is happening?
Cosmetics distributor, 30 people · Illustrative teaching case
A distributor wins a supermarket chain as a customer. The chain pays in 90 days; the distributor pays its importer in 30 and holds 60 days of stock. Every additional shilling of sales to the chain needs months of funding. The business negotiates staged deliveries, shorter stock holding and better supplier terms before scaling the account.
Full teaching case: Revenue Without Cash
DecisionWhat does the leader need to decide?
Accept the new volume on the customer's terms, or restructure the cycle first?
FrameworkHow should they think about the problem?
Cash conversion cycle
Cash conversion cycle = days of stock + days receivable − days payable. Each day removed releases roughly one day's cost of sales in cash.
ToolWhat can they use?
Working capital calculatorCalculation
- Days of stock = stock ÷ cost of sales × 365
- Days receivable = receivables ÷ revenue × 365
- Days payable = payables ÷ purchases × 365
- Cash released per day saved = annual cost of sales ÷ 365
ApplicationHow does it apply to their business?
Apply it to your own business:
- Calculate your cash conversion cycle
- Calculate the cash released by cutting it by ten days
- Choose one component to improve first
ImplementationWhat changes?
What should change in the business:
- Set targets for each component
- Assign owners: stock, collections and payables
- Review the cycle monthly
ReviewDid it work?
How to tell whether the change worked:
- Has the cycle shortened?
- How much cash has been released?
- Has growth needed less external funding?
After this module you should be able to decide
Accept the new volume on the customer's terms, or restructure the cycle first?
And leave with: Your cash conversion cycle and a plan to shorten it.
Sequence · Finance
Related modules
Part of these learning paths