Working Capital

Working Capital Optimization

> DSO, DPO, DIO, cash conversion cycle — managing accounts receivable, inventory, and payables for optimal liquidity.

When to Activate

• Analyzing or optimizing the cash conversion cycle
• Accounts receivable management and DSO reduction
• Inventory optimization strategies
• Accounts payable strategy and DPO management
• Supply chain finance program evaluation
• Factoring or reverse factoring assessment
• Working capital benchmarking against industry peers
• Cash flow forecasting related to operating working capital
• Treasury dashboard design for working capital metrics

Core Concepts

Cash Conversion Cycle (CCC)

The CCC measures how many days it takes to convert working capital investments into cash:

CCC = DSO + DIO - DPO

| Component | Formula | Meaning | |-----------|---------|---------| | DSO (Days Sales Outstanding) | (Accounts Receivable / Revenue) x 365 | How long customers take to pay | | DIO (Days Inventory Outstanding) | (Inventory / COGS) x 365 | How long inventory sits before being sold | | DPO (Days Payable Outstanding) | (Accounts Payable / COGS) x 365 | How long the company takes to pay suppliers |

Interpretation:

• Lower CCC = less cash tied up in operations = better liquidity
• Negative CCC = company collects from customers before paying suppliers (e.g., Amazon, supermarkets)
• CCC varies dramatically by industry

CCC benchmarks by industry:

| Industry | Typical CCC | DSO | DIO | DPO | |----------|-------------|-----|-----|-----| | Retail (grocery) | -10 to +5 days | 3-5 | 20-30 | 30-45 | | Technology (software) | 30-60 days | 40-70 | 0-10 | 30-50 | | Manufacturing | 40-90 days | 40-60 | 50-80 | 40-60 | | Construction | 60-120 days | 60-90 | 20-40 | 40-60 | | Pharma/Healthcare | 80-150 days | 50-70 | 80-120 | 40-60 |

Accounts Receivable Management

Credit policy components:

• Credit terms: Net 30, Net 60, 2/10 Net 30 (2% discount for payment within 10 days)
• Credit scoring: Internal scoring model based on payment history, financial strength, industry
• Credit limits: Maximum outstanding balance per customer
• Collection process: Dunning schedule (reminder, warning, collection, legal)

DSO reduction levers:

1. Tighten credit terms (shorter payment periods)
2. Offer early payment discounts (evaluate cost: 2/10 net 30 = 36.7% annualized cost)
3. Improve invoicing speed (invoice on delivery, electronic invoicing)
4. Implement systematic dunning process
5. Reduce billing errors and disputes (root cause of slow payments)
6. Segment customers by payment behavior and tailor approach
7. Automate cash application (matching payments to invoices)

Early payment discount economics:

Annualized cost of discount = (Discount% / (100% - Discount%)) x (365 / (Full term - Discount period))
Example: 2/10 Net 30 = (2/98) x (365/20) = 37.2% annualized

If company's cost of capital 120 days _________ ____% _____ Write-down review Total AR _________ 100% _____

## Templates

### Working Capital Dashboard

Period: _______________ Company: _______________

Q-4 Q-3 Q-2 Q-1 Current Target DSO (days) ____ ____ ____ ____ ____ ____ DIO (days) ____ ____ ____ ____ ____ ____ DPO (days) ____ ____ ____ ____ ____ ____ CCC (days) ____ ____ ____ ____ ____ ____

Net Working Capital (€m) Accounts Receivable ____ ____ ____ ____ ____ Inventory ____ ____ ____ ____ ____ Accounts Payable (____ (____ (____ (____ (____ Net WC ____ ____ ____ ____ ____ NWC / Revenue ____% ____% ____% ____% ____%

Cash freed vs prior Q: € ____________ Annualized value at WACC: € ____________

### SCF Program Evaluation

Program type: [ ] Reverse factoring [ ] Factoring [ ] Dynamic discounting

Eligible volume: € ____________ / year Expected participation: ____________% Active volume: € ____________ / year

Buyer perspective: DPO extension (days): ____________ Cash freed: € ____________ Annual benefit at WACC: € ____________ Program cost: € ____________ / year Net benefit: € ____________ / year

Supplier perspective: Days paid earlier: ____________ Discount rate (annualized): ____________% Cost vs. own financing: ____________% savings

Accounting treatment: [ ] Trade payable (on-balance) [ ] Bank borrowing (reclassification risk) Rationale: _______________

## Quality Gate

- [ ] CCC is calculated correctly (DSO + DIO - DPO) with consistent formulas
- [ ] Metrics are benchmarked against relevant industry peers
- [ ] Root causes for metric deviations are identified (not just symptoms)
- [ ] Cash impact of improvements is quantified in absolute terms
- [ ] AR aging analysis is current and collection actions are escalated appropriately
- [ ] Inventory includes ABC classification and obsolescence review
- [ ] AP terms are optimized without damaging critical supplier relationships
- [ ] SCF programs are evaluated for both buyer and supplier benefit
- [ ] Accounting treatment of SCF is reviewed (trade payable vs. debt reclassification)
- [ ] Working capital targets are set and monitored monthly
- [ ] Cash flow forecast incorporates working capital movements

## Source & license

This open-source skill is cataloged on AgentStack and links to its original source — we do not rehost the code.

- **Author:** [brainbytes-dev](https://github.com/brainbytes-dev)
- **Source:** [brainbytes-dev/everything-claude-finance](https://github.com/brainbytes-dev/everything-claude-finance)
- **License:** MIT

Install and usage instructions live in the source repository linked above.