Learning Objectives Define working capital management. (LO1) Describe the effect asset growth has on working capital positions. (LO2) Identify working capital management considerations for permanent components, the effect of sales/production schedules and liquidity versus risk. (LO3) Identify the cash flow cycle of the firm. (LO4)

LO3 and LO4 Figure 6-4 The nature of asset growth (Yawakuzi)

LO4 Cash Flow Cycle A firm’s ability to quickly convert assets into cash is referred to as liquidity. When a firm’s liquidity is called into question, it often is difficult to continue in business. Liquidity is largely determined by the cash flow cycle. Sales, receivables, and inventory form the basis for cash flow, but the firm’s other activities can also affect cash inflows and outflows.

LO4 Figure 6-7 Expanded cash flow cycle

LO4 Cash Conversion Cycle Managers should pay close attention to the time it takes from the initial outlay of funds for raw materials until the firm collects funds from its clients for the finished product, which is referred to as the cash conversion cycle. A firm’s cash conversion cycle = inventory holding period + average collection period - accounts payable period If the cash conversion cycle is positive, then there is a cash gap that will require the firm to obtain financing.