Financial Management: Core Concepts, Third Edition

13.1 The Cash Conversion Cycle

You learned in Chapter 2 that working capital consists of a company’s current assets and liabilities. Managing these assets and liabilities in such a way as to improve the company’s flow of funds is what working capital management is all about. This strategy focuses on maintaining efficient levels of both current assets and current liabilities so that a company has greater cash inflow than cash outflow. It is not only the amount of cash flow that is important, but also the timing of the cash flow.

Managing working capital is the operational side of budgeting. When we put a budget together, we anticipate the amount of the future cash flow and the timing of that cash flow. When we manage working capital, we are trying ...