CFA L1 / Corporate / M4. Working Capital
Module 4 · Corporate Issuers

Working Capital and Liquidity

EN: Cash conversion cycle and short-term financing.
VN: Chu kỳ tiền mặt và tài trợ ngắn hạn.

1. Working Capital Core

\[ WC = \text{Current assets} - \text{Current liabilities} \]
Practice problem

CA = $250M, CL = $150M. Compute working capital.

Show solution
WC = 250 − 150
WC = $100M

2. Cash Conversion Cycle Core

\[ CCC = DSO + DOH - DPO \]

Components

  • DSO Days sales outstanding = 365 / receivables turnover.
  • DOH Days of inventory on hand = 365 / inventory turnover.
  • DPO Days payables outstanding = 365 / payables turnover.

Shorter CCC = better liquidity; some companies (Amazon) have negative CCC — collect from customers before paying suppliers.

Practice problem

DSO = 40, DOH = 60, DPO = 35. Compute CCC.

Show solution
CCC = 40 + 60 − 35
CCC = 65 days

3. Short-Term Funding Sources Concept

  • Trade credit Supplier payment terms (e.g. "2/10 net 30").
  • Bank LoC Committed/uncommitted lines of credit.
  • Commercial paper Short-term unsecured promissory note (large investment-grade firms).
  • Factoring Sell AR at a discount.
  • Bankers' acceptance Bank-guaranteed time draft (trade finance).

4. Cost of Trade Credit (Foregone Discount) Core

\[ \text{Cost} = \left(1 + \frac{\text{Discount}}{1 - \text{Discount}}\right)^{365 / (\text{Net} - \text{Discount period})} - 1 \]
Practice problem

Terms 2/10 net 30. Annualized cost of forgoing the discount?

Show solution
(1 + 0.02/0.98)^(365/20) − 1 = (1.02041)^18.25 − 1
≈ 44.6%