Working Capital and Liquidity - Module 4 – Corporate Issuer – CFA® Level I 2025 (and 2026)

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0:00 Introduction: Why Working Capital & Liquidity Matter
Overview of importance for daily operations
Goals for the session (CCC, liquidity ratios, short-term funding)

0:26 Short-Term Assets & Liabilities
Receivables, inventory, payables
How payment and delivery terms affect cash flow
Example of a 90-day vs. 60-day term mismatch

1:08 The Operating Cycle
Definition: Time from cash out (buying materials) to cash in (collecting from sales)
Multiple cycles per year and its cash flow implications
Production → Sales → Collection → Purchase loop

1:45 Recording Future Cash Flows on the Balance Sheet
Short-term assets (A/R, inventory) vs. short-term liabilities (payables, loans)
Link to net working capital and daily liquidity

2:30 Cash Conversion Cycle (CCC)
Formula: (DOH + DSO) – DPO
Why shorter CCC = more efficient cash usage
Real-world example: Negative CCC at Dell

3:21 Improving the CCC
Minimizing days inventory on hand (inventory optimization)
Accelerating days sales outstanding (collection strategies)
Extending days payable outstanding (negotiation with suppliers)

4:05 Primary vs. Secondary Liquidity Sources
Primary: Cash/securities, borrowings, operating cash flow
Secondary: Cutting dividends, issuing equity, selling assets
Bankruptcy as a last resort

5:00 Short-Term Financing Needs
Impact of cyclical or seasonal cash requirements
Bank loans, lines of credit, commercial paper options
Trade credits and negotiations

5:35 Drags & Pulls on Liquidity
Drags: uncollected receivables, obsolete inventory, restricted borrowing
Pulls: early supplier payments, reduced credit lines
Managing each to avoid cash crunch

6:15 Liquidity Ratios
Current ratio = Current Assets / Current Liabilities
Quick ratio (“acid test”) excludes inventory
Cash ratio = (Cash + Marketable Sec) / Current Liabilities
Benchmarking vs. industry and historical norms

7:00 Real-World Example of Ratio Interpretation
High current ratio vs. potential inefficiency
Tailoring ratio targets to industry specifics

7:20 Approaches to Working Capital (Conservative, Aggressive, Moderate)
Conservative: higher current assets, more long-term funding
Aggressive: minimal current assets, more short-term debt
Moderate (“matching” approach) balancing risk & cost

8:00 Credit Policies & Receivables Management
Trade-off between higher sales and increased A/R risk
Early payment discounts, late payment penalties
Aligning credit policy with company’s working capital strategy

9:20 Short-Term Financing Strategies
Ensuring diverse credit sources (banks, bond markets, trade credit)
Minimizing borrowing costs, interest rate fluctuations
Seasonal funding demands (e.g., retailers)

10:08 Factors Influencing Short-Term Funding Choices
Firm size & credit rating (broader vs. limited financing options)
Legal/regulatory environment in emerging vs. developed markets
Collateralizable assets & industry-specific constraints

11:00 Example of Managing Seasonal Peaks
Retailer ramping up inventory before holidays
Use of short-term loans or lines of credit
Balancing DSO and DPO in high-volume periods

12:00 Beyond the Basics: Real-World Scenarios
Potential for sudden shifts in supply chain or sales cycles

13:00 Advanced Liquidity Tactics
Forward contracts, factoring receivables, inventory securitization

14:00 Link to Capital Structure & Risk Management
How short-term decisions interface with long-term leverage

15:00 Deeper Dive: Cost-Benefit Analysis of Each Method
Opportunity cost of excess cash vs. risk of short supply

16:00 Industry Variations & Market Conditions
How commodity cycles, tech disruptions, or economic downturns affect working capital
Stress testing liquidity in cyclical vs. stable industries