Folder:
115 CFA
File:
115.050.05.01 Corporate Finance - Reading 35 - 1. Managing and Measuring Liquidity

1. Managing and Measuring Liquidity

a. describe primary and secondary sources of liquidity and factors that influence a company's liquidity position;

b. compare a company's liquidity measures with those of peer companies;

c. evaluate working capital effectiveness of a company based on its operating and cash conversion cycles and compare the company's effectiveness with that of peer companies;

What is working capital management and what is the goal?
Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses.

What is the operating cycle?
Operating cycle = Number of days in inventory + Number of days of receivables

What is the net operating cycle?
Net operating cycle (cash conversion cycle) = Number of days in inventory + Number of days of receivables - Number of days of payables


Source:
  • CFA