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.Ask a probing question, substantiated with additional background information, evidence or research.
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Working capital acts as a measure of a company’s overall health and liquidity because it includes inventory and cash. There are two types of working capital, negative and positive. For a company to be in good health, its working capital should be positive which would also indicate that it can meet its short-term liabilities. On the other hand, negative working capital is an indication that the company can't. This is why working capital is such a sensitive thing to analysts since a decrease would indicate the firm is being overleveraged, its bills are being paid too quickly, receivables are being collected too slowly, and it's struggling with sales growth. It is challenging to maintain working capital in today's market has the day to day expenses are high. Looking at the above scenario, management of inventory and cash conversion cycle will play a vital role as cash conversion cycle will measure how quickly a company can turn their cash into inventory and back into cash whereas inventory management controls ordering, storing and use of company components that it uses to produces items for sale. Cash is used to buy inventory and then selling it will generate cash again.
Cash conversion cycle will look at the time required to sell inventory, collect receivables and the time a company can take to pay the bills without it incurring penalties.
It measures: DIO+DSO-DPO = CCC
DIO – outstanding inventory
DPO – outstanding payable
DSO- outstanding sales
Reference
Importance of working capital management [Video file]. (2017, May 12). Retrieved from https://www.youtube.com/watch?v=maF024vY1es
NPV vs IRR - Which is Better? - WallStreetMojo. (2018, October 5). Retrieved from https://www.wallstreetmojo.com/npv-vs-irr/
