Working Capital Fundamentals
The Cash Conversion Cycle (CCC)
Working capital management centers on the Cash Conversion Cycle — the time it takes to convert investments in inventory and other resources into cash flows from sales.
Formula: CCC = DIO + DSO - DPO
Where:
- DIO (Days Inventory Outstanding) = How many days inventory is held
- DSO (Days Sales Outstanding) = How many days to collect receivables from customers
- DPO (Days Payable Outstanding) = How many days to pay suppliers
The Working Capital Tension
Every supply chain has a fundamental conflict:
- Buyers want to extend payment terms (maximize DPO → improve their cash position)
- Suppliers want to be paid quickly (minimize DSO → reduce their cash tied up in receivables)
This tension creates the opportunity for
Supply Chain Finance (SCF) — using the buyer's stronger credit rating to help suppliers access cheaper financing.
Why Supplier Financial Health Matters to Buyers
A buyer's supply chain is only as strong as its weakest supplier. If key suppliers face cash flow crises:
- Production halts
- Quality declines
- Business continuity risk increases
SCF programs address this by improving supplier liquidity without increasing the buyer's borrowing.
Key Working Capital Metrics
| Metric | Formula | Lower is Better For |
|---|
| DIO | (Inventory ÷ COGS) × 365 | Buyer |
| DSO | (Receivables ÷ Revenue) × 365 | Supplier |
| DPO | (Payables ÷ COGS) × 365 | Buyer |
| CCC | DIO + DSO - DPO | Both (lower = better) |