Unit 14 examines the lifeblood of any operating business: liquidity. Long-term investments (Units 10–12) determine a firm's strategic direction; working capital management determines whether it survives day-to-day. A profitable company can still go bankrupt if it runs out of cash — this is the central paradox of working capital. The Cash Conversion Cycle measures how long cash is tied up in operations. Managing receivables, inventory, and payables efficiently frees up cash without borrowing. For BBYM entrepreneurs and community members alike, these principles apply directly: the personal emergency fund is personal working capital — and the same discipline that protects a business from cash crises protects a household from financial distress.
Part 1 — Core Topics Explained
Every major concept tested on the Unit 14 assessment
📋 Learning Objectives
- Define working capital and net working capital; explain why liquidity matters
- Calculate the Cash Conversion Cycle (CCC) from its three components
- Explain each component of CCC: DSO, DIO, DPO — and how to improve each
- Describe optimal cash management strategies for businesses
- Explain accounts receivable management: credit policy, collection, aging schedules
- Describe inventory management: EOQ, just-in-time, and carrying vs. ordering costs
- Compare short-term financing options: line of credit, commercial paper, trade credit
- Apply working capital concepts to personal emergency fund planning for BBYM community members
1. Working Capital — The Foundation
Working capital refers to the short-term assets and liabilities that fund a business's day-to-day operations. Unlike long-term capital (buildings, equipment), working capital cycles continuously — cash buys inventory, inventory becomes receivables, receivables become cash again.
Net Working Capital (NWC)
NWC = Current Assets − Current Liabilities
Current Assets: cash, accounts receivable, inventory, prepaid expenses (convert to cash within 1 year)
Current Liabilities: accounts payable, accrued wages, short-term debt, current portion of long-term debt
NWC > 0: firm can meet short-term obligations — financially healthy liquidity position
NWC < 0: current liabilities exceed current assets — potential liquidity crisis
Current Liabilities: accounts payable, accrued wages, short-term debt, current portion of long-term debt
NWC > 0: firm can meet short-term obligations — financially healthy liquidity position
NWC < 0: current liabilities exceed current assets — potential liquidity crisis
BBYM Culinary Enterprise — Net Working Capital Calculation:
Current Assets:
Cash: $8,500 | Accounts Receivable (catering invoices): $4,200 | Inventory (food supplies): $1,800
Total Current Assets = $14,500
Current Liabilities:
Accounts Payable (suppliers): $3,100 | Accrued wages: $1,400 | Short-term note payable: $2,000
Total Current Liabilities = $6,500
NWC = $14,500 − $6,500 = $8,000
The enterprise has $8,000 more in short-term assets than short-term obligations — a healthy cushion. The current ratio = $14,500/$6,500 = 2.23, meaning it has $2.23 in current assets for every $1 of current liabilities.
Current Assets:
Cash: $8,500 | Accounts Receivable (catering invoices): $4,200 | Inventory (food supplies): $1,800
Total Current Assets = $14,500
Current Liabilities:
Accounts Payable (suppliers): $3,100 | Accrued wages: $1,400 | Short-term note payable: $2,000
Total Current Liabilities = $6,500
NWC = $14,500 − $6,500 = $8,000
The enterprise has $8,000 more in short-term assets than short-term obligations — a healthy cushion. The current ratio = $14,500/$6,500 = 2.23, meaning it has $2.23 in current assets for every $1 of current liabilities.
2. The Cash Conversion Cycle — Assessment Q14 Focus
The Cash Conversion Cycle (CCC) measures how many days cash is tied up in the operating cycle — from when cash is spent on inventory until cash is collected from customers. A shorter CCC means faster cash recovery and less financing needed.
Cash Conversion Cycle (CCC)
CCC = DSO + DIO − DPO
DSO = Days Sales Outstanding (how long to collect from customers)
DIO = Days Inventory Outstanding (how long inventory sits before being sold)
DPO = Days Payable Outstanding (how long the firm takes to pay its suppliers)
Assessment Q14: DSO=45, DIO=30, DPO=20 → CCC = 45 + 30 − 20 = 55 days
DIO = Days Inventory Outstanding (how long inventory sits before being sold)
DPO = Days Payable Outstanding (how long the firm takes to pay its suppliers)
Assessment Q14: DSO=45, DIO=30, DPO=20 → CCC = 45 + 30 − 20 = 55 days
CCC Pipeline — Assessment Q14 (55 Days)
DIO — Inventory
30 days
Buy supplies → sell product
+
DSO — Receivables
45 days
Sell product → collect cash
−
DPO — Payables
20 days
Free supplier financing
= CCC: 55 days
Each day in CCC ties up cash. At $1,000/day in sales, 55 days × $1,000 = $55,000 constantly locked in the operating cycle.
Assessment Q14 — Worked Out:
DSO = 45 days | DIO = 30 days | DPO = 20 days
CCC = 45 + 30 − 20 = 55 days
Common errors: Adding all three (45+30+20=95) — forgets that DPO reduces the cycle because suppliers are financing inventory; subtracting all three — DSO and DIO both extend the cycle. Only DPO is subtracted because it represents free financing from suppliers.
DSO = 45 days | DIO = 30 days | DPO = 20 days
CCC = 45 + 30 − 20 = 55 days
Common errors: Adding all three (45+30+20=95) — forgets that DPO reduces the cycle because suppliers are financing inventory; subtracting all three — DSO and DIO both extend the cycle. Only DPO is subtracted because it represents free financing from suppliers.
3. The Three CCC Components — Formulas and Improvement Strategies
| Component | Formula | What It Measures | Goal | How to Improve |
|---|---|---|---|---|
| DSO (Days Sales Outstanding) | Accounts Receivable ÷ (Annual Sales / 365) | Average days to collect from customers after a sale | Minimize — collect faster | Tighten credit terms; offer early payment discounts; send invoices promptly; follow up on overdue accounts |
| DIO (Days Inventory Outstanding) | Inventory ÷ (COGS / 365) | Average days inventory sits before being sold | Minimize — turn inventory faster | Just-in-time ordering; reduce slow-moving stock; improve sales forecasting; EOQ optimization |
| DPO (Days Payable Outstanding) | Accounts Payable ÷ (COGS / 365) | Average days taken to pay suppliers | Maximize — pay suppliers as late as allowed | Negotiate extended payment terms; take full advantage of net 30/60/90 terms; but never damage supplier relationships |
Improving CCC — BBYM Catering Enterprise Example:
Current: DSO=45, DIO=30, DPO=20 → CCC = 55 days
After improvements:
DSO: Implement net 30 invoice terms with 2% early-pay discount → DSO falls to 32 days
DIO: Switch to just-in-time ingredient ordering for catering events → DIO falls to 18 days
DPO: Negotiate net 45 terms with food distributors (vs. current net 20) → DPO rises to 38 days
New CCC = 32 + 18 − 38 = 12 days
Cash freed up = (55 − 12) days × $1,000/day revenue = $43,000 in working capital released — capital that can be reinvested in growth, used to reduce short-term borrowing, or held as a liquidity buffer.
Current: DSO=45, DIO=30, DPO=20 → CCC = 55 days
After improvements:
DSO: Implement net 30 invoice terms with 2% early-pay discount → DSO falls to 32 days
DIO: Switch to just-in-time ingredient ordering for catering events → DIO falls to 18 days
DPO: Negotiate net 45 terms with food distributors (vs. current net 20) → DPO rises to 38 days
New CCC = 32 + 18 − 38 = 12 days
Cash freed up = (55 − 12) days × $1,000/day revenue = $43,000 in working capital released — capital that can be reinvested in growth, used to reduce short-term borrowing, or held as a liquidity buffer.
Part 2 — Managing Each Working Capital Component
Receivables, inventory, payables, cash management, and short-term financing options
Accounts Receivable Management
Receivables represent money owed to the business by customers who bought on credit. They are an asset — but they're not cash yet, and they carry risk of non-payment (bad debt). The goal is to collect as quickly as possible without damaging customer relationships.
Credit Policy Trade-Off:
Loose credit policy (extend credit to almost anyone):
• More sales → higher revenue and profit potential
• Higher DSO → more cash tied up in receivables
• More bad debt → higher losses from non-payment
Tight credit policy (only sell to highest-quality customers):
• Fewer sales → revenue constrained
• Lower DSO → cash collected faster
• Less bad debt → lower collection losses
Optimal credit policy maximizes: (Revenue benefit of additional credit sales) − (Cost of additional receivables investment + bad debt losses). For BBYM catering enterprises, a practical rule: require 50% deposit upfront for events over $500, with balance due within 15 days of delivery — this limits DSO to 15 days maximum for the non-deposit portion.
Loose credit policy (extend credit to almost anyone):
• More sales → higher revenue and profit potential
• Higher DSO → more cash tied up in receivables
• More bad debt → higher losses from non-payment
Tight credit policy (only sell to highest-quality customers):
• Fewer sales → revenue constrained
• Lower DSO → cash collected faster
• Less bad debt → lower collection losses
Optimal credit policy maximizes: (Revenue benefit of additional credit sales) − (Cost of additional receivables investment + bad debt losses). For BBYM catering enterprises, a practical rule: require 50% deposit upfront for events over $500, with balance due within 15 days of delivery — this limits DSO to 15 days maximum for the non-deposit portion.
Accounts Receivable Aging Schedule — BBYM Catering:
The aging schedule reveals that 7% of receivables are potentially at risk. Monitoring the aging schedule monthly prevents small collection problems from becoming large bad debt write-offs.
| Age of Invoice | Amount | % of Total | Bad Debt Estimate | Action |
|---|---|---|---|---|
| 0–30 days | $3,200 | 76% | 2% = $64 | Monitor normally |
| 31–60 days | $700 | 17% | 10% = $70 | Send reminder & call |
| 61–90 days | $250 | 6% | 25% = $62.50 | Formal demand letter |
| 90+ days | $50 | 1% | 50% = $25 | Collections / write-off |
| Total | $4,200 | 100% | $221.50 (5.3%) | — |
The aging schedule reveals that 7% of receivables are potentially at risk. Monitoring the aging schedule monthly prevents small collection problems from becoming large bad debt write-offs.
Inventory Management
Inventory is a necessary asset for product-based businesses — but holding too much inventory is costly. The goal is to hold enough to meet customer demand without excess.
Inventory Carrying Costs vs. Ordering Costs — The EOQ Trade-Off:
Carrying costs (rise with inventory level): storage, insurance, spoilage, obsolescence, opportunity cost of capital tied up in stock
Ordering costs (fall with inventory level): purchase processing, delivery fees, minimum order quantities — ordering frequently in small batches is expensive
The Economic Order Quantity (EOQ) minimizes the total of both costs:
EOQ = √(2 × Annual Demand × Order Cost ÷ Carrying Cost per unit)
BBYM Food Truck Example:
Annual ingredient demand: 5,200 units | Order cost: $25/order | Carrying cost: $2/unit/year
EOQ = √(2 × 5,200 × $25 / $2) = √(260,000 / 2) = √130,000 = 360 units per order
Order 360 units at a time → place orders roughly 5,200/360 ≈ 14 times/year ↔ roughly every 26 days. This minimizes the combined inventory cost and directly reduces DIO.
Carrying costs (rise with inventory level): storage, insurance, spoilage, obsolescence, opportunity cost of capital tied up in stock
Ordering costs (fall with inventory level): purchase processing, delivery fees, minimum order quantities — ordering frequently in small batches is expensive
The Economic Order Quantity (EOQ) minimizes the total of both costs:
EOQ = √(2 × Annual Demand × Order Cost ÷ Carrying Cost per unit)
BBYM Food Truck Example:
Annual ingredient demand: 5,200 units | Order cost: $25/order | Carrying cost: $2/unit/year
EOQ = √(2 × 5,200 × $25 / $2) = √(260,000 / 2) = √130,000 = 360 units per order
Order 360 units at a time → place orders roughly 5,200/360 ≈ 14 times/year ↔ roughly every 26 days. This minimizes the combined inventory cost and directly reduces DIO.
Just-In-Time (JIT) Inventory — The BBYM Catering Approach:
JIT orders inventory precisely when needed, minimizing holding time and storage costs. Ideal for perishable items (food ingredients) where spoilage is a major carrying cost.
For BBYM catering events: order ingredients 2 days before each event based on confirmed headcount. Zero inventory carried between events. Result: DIO approaches 2–3 days vs. a traditional 30+ day inventory holding period.
Trade-off: JIT requires reliable suppliers and accurate demand forecasting. A supplier failure or demand surprise can leave the business unable to deliver — reputational and financial risk. Maintain a minimal safety stock (10–15% of typical order) to buffer against supply disruptions.
JIT orders inventory precisely when needed, minimizing holding time and storage costs. Ideal for perishable items (food ingredients) where spoilage is a major carrying cost.
For BBYM catering events: order ingredients 2 days before each event based on confirmed headcount. Zero inventory carried between events. Result: DIO approaches 2–3 days vs. a traditional 30+ day inventory holding period.
Trade-off: JIT requires reliable suppliers and accurate demand forecasting. A supplier failure or demand surprise can leave the business unable to deliver — reputational and financial risk. Maintain a minimal safety stock (10–15% of typical order) to buffer against supply disruptions.
Short-Term Financing Options
| Source | Cost | Availability | Best Use | BBYM Application |
|---|---|---|---|---|
| Trade Credit (Accounts Payable) | 0% if paid within terms; implicit if discount forgone | Available from any supplier offering net 30/60/90 | Routine operating purchases; the most common source of short-term financing | Food suppliers, equipment vendors; always use full net terms before paying |
| Line of Credit (LOC) | Prime + 1–3%; only pay interest when drawn | Requires bank approval; credit score dependent | Seasonal cash flow gaps; bridge financing between receivable collections | CDFI LOC for slow months or between large catering contracts |
| Commercial Paper | Below bank rate; market-driven | Only for large, investment-grade corporations | Large corporations funding short-term needs | Not applicable for BBYM enterprises (requires large scale) |
| Bank Loans (Short-Term) | Prime + 2–5%; fixed term | Requires collateral and creditworthiness | Specific, short-duration capital needs with clear repayment source | Equipment financing; inventory buildup for large contract |
| CDFI Short-Term Loans | Below market (4–7%); mission-aligned | Available to qualifying community enterprises | Working capital needs for underserved businesses that lack conventional bank access | Primary short-term borrowing option for BBYM enterprises |
The Hidden Cost of Forgone Trade Discounts:
Suppliers often offer early payment discounts: "2/10 net 30" means take a 2% discount if you pay in 10 days, or pay the full amount in 30 days.
Annualized cost of NOT taking the discount:
Cost = (Discount % / (1−Discount%)) × (365 / (Net days − Discount days))
= (0.02 / 0.98) × (365 / (30−10))
= 2.04% × 18.25 = 37.2% per year
Choosing NOT to take a 2% discount for 20 extra days of float is equivalent to borrowing at 37.2% annually — far more expensive than any bank loan or CDFI credit. BBYM enterprises should always take available early-pay discounts if they have the cash to do so.
Suppliers often offer early payment discounts: "2/10 net 30" means take a 2% discount if you pay in 10 days, or pay the full amount in 30 days.
Annualized cost of NOT taking the discount:
Cost = (Discount % / (1−Discount%)) × (365 / (Net days − Discount days))
= (0.02 / 0.98) × (365 / (30−10))
= 2.04% × 18.25 = 37.2% per year
Choosing NOT to take a 2% discount for 20 extra days of float is equivalent to borrowing at 37.2% annually — far more expensive than any bank loan or CDFI credit. BBYM enterprises should always take available early-pay discounts if they have the cash to do so.
Part 3 — Personal Working Capital & Emergency Fund Planning
The household parallel to business working capital — building financial resilience in the BBYM community
The Business-Personal Parallel
Every concept in business working capital has a direct parallel in personal finance. The emergency fund is personal working capital — it exists to ensure you can meet short-term financial obligations even when cash inflows are disrupted.
Business Term
Cash & Liquid Assets
Checking / Savings / Money Market
Accounts Receivable
Expected freelance income, reimbursements
Inventory
Prepaid goods, supplies on hand
Accounts Payable
Monthly bills, utilities, subscriptions
Short-Term Debt
Credit card balance, payday loan
Net Working Capital
Emergency fund + liquid assets minus bills due
Line of Credit
Credit card (expensive!) or HELOC
Cash Conversion Cycle
Time between income receipt and expense due dates
Personal Finance Application
Keep 1–2 months of expenses in checking; rest in HYSA
Track amounts due to you; follow up promptly
Avoid over-buying perishables; minimize idle capital
Know exactly what's due and when — budget monthly
Pay in full monthly; avoid revolving high-interest debt
Emergency fund = your personal liquidity cushion
Credit card LOC costs 20%+ annually — last resort only
Pay yourself first on payday before bills arrive
Building the BBYM Emergency Fund — Step by Step
Emergency Fund as Personal Working Capital — The BBYM Framework:
Step 1 — Calculate your monthly fixed expenses (your personal "CCC floor"):
Rent/mortgage + utilities + car + insurance + minimum debt payments + food = monthly survival minimum
Example: $800 + $150 + $350 + $180 + $250 + $300 = $2,030/month
Step 2 — Determine target emergency fund size:
• Minimum: 3 months × $2,030 = $6,090 (cover job loss for 3 months)
• Recommended: 6 months × $2,030 = $12,180 (cover extended disruption, medical crisis)
• Single-income household / commission-based income: 9–12 months
Step 3 — Where to hold the emergency fund:
High-Yield Savings Account (HYSA) at 4–5% APY — earns interest while remaining instantly accessible. Never in stocks (value can drop 30% right when you need the money most) and never in a CD with withdrawal penalties.
Step 4 — Build it systematically:
Save $200–$300/month for 25–50 months. Treat it as a fixed monthly "payment to self" with the same priority as rent. Set up automatic transfer on payday before other spending tempts you. Once funded, only use it for true emergencies (not vacations or discretionary wants).
Step 1 — Calculate your monthly fixed expenses (your personal "CCC floor"):
Rent/mortgage + utilities + car + insurance + minimum debt payments + food = monthly survival minimum
Example: $800 + $150 + $350 + $180 + $250 + $300 = $2,030/month
Step 2 — Determine target emergency fund size:
• Minimum: 3 months × $2,030 = $6,090 (cover job loss for 3 months)
• Recommended: 6 months × $2,030 = $12,180 (cover extended disruption, medical crisis)
• Single-income household / commission-based income: 9–12 months
Step 3 — Where to hold the emergency fund:
High-Yield Savings Account (HYSA) at 4–5% APY — earns interest while remaining instantly accessible. Never in stocks (value can drop 30% right when you need the money most) and never in a CD with withdrawal penalties.
Step 4 — Build it systematically:
Save $200–$300/month for 25–50 months. Treat it as a fixed monthly "payment to self" with the same priority as rent. Set up automatic transfer on payday before other spending tempts you. Once funded, only use it for true emergencies (not vacations or discretionary wants).
What Happens Without an Emergency Fund — The Debt Spiral:
Car breaks down: $1,200 repair needed. No emergency fund.
Option A (with emergency fund): Pay cash → continue to work → replenish fund over next 4 months. Cost: $0 in interest.
Option B (without emergency fund): Put on credit card at 24% APR → pay minimum $30/month → takes 5+ years to pay off → total cost: $1,200 + $800 in interest = $2,000+ total.
The $800 difference is the cost of not having a working capital buffer. Over a lifetime of financial disruptions (car repairs, medical bills, job gaps, appliance failures), the household without an emergency fund pays hundreds of thousands more in high-interest financing costs than the household that maintains one. The emergency fund is not just a safety net — it is an investment in avoiding the most expensive borrowing imaginable.
Car breaks down: $1,200 repair needed. No emergency fund.
Option A (with emergency fund): Pay cash → continue to work → replenish fund over next 4 months. Cost: $0 in interest.
Option B (without emergency fund): Put on credit card at 24% APR → pay minimum $30/month → takes 5+ years to pay off → total cost: $1,200 + $800 in interest = $2,000+ total.
The $800 difference is the cost of not having a working capital buffer. Over a lifetime of financial disruptions (car repairs, medical bills, job gaps, appliance failures), the household without an emergency fund pays hundreds of thousands more in high-interest financing costs than the household that maintains one. The emergency fund is not just a safety net — it is an investment in avoiding the most expensive borrowing imaginable.
Working Capital Ratios — Measuring Business Liquidity
| Ratio | Formula | Healthy Range | Interpretation |
|---|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | 1.5–3.0 | How many dollars of current assets per dollar of current liabilities. Too low = liquidity risk; too high = inefficient use of capital (holding excess cash/inventory) |
| Quick Ratio (Acid Test) | (Cash + Receivables) ÷ Current Liabilities | 1.0–2.0 | Like current ratio but excludes inventory (least liquid current asset). Better test of immediate liquidity. A company with large slow-moving inventory may have a high current ratio but low quick ratio — a warning sign. |
| Cash Ratio | Cash ÷ Current Liabilities | 0.2–0.5 | Most conservative measure — can the firm pay all current liabilities with cash right now? Very high cash ratio means the firm is holding too much idle cash. |
| Operating Cash Flow Ratio | Operating Cash Flow ÷ Current Liabilities | > 1.0 | Can ongoing operations generate enough cash to cover short-term obligations? More meaningful than balance sheet ratios for assessing true liquidity from operations. |
Part 4 — Key Terms Defined
Master these 14 terms for the Unit 14 assessment
Working Capital
The short-term assets and liabilities that fund a business's day-to-day operations. Includes cash, receivables, and inventory on the asset side; accounts payable and short-term debt on the liability side. Working capital cycles continuously — cash buys inventory, inventory generates receivables, receivables become cash. Distinct from long-term capital (buildings, equipment) which is permanent.
Net Working Capital (NWC)
Current Assets minus Current Liabilities. The liquidity cushion available to meet short-term obligations. NWC > 0 is generally healthy — the firm can cover current liabilities from current assets. NWC < 0 is a warning sign — current liabilities exceed current assets, creating potential payment default risk. Increasing NWC typically requires cash investment; efficiently managed NWC releases cash for growth.
Cash Conversion Cycle (CCC)
The number of days cash is tied up in the operating cycle: CCC = DSO + DIO − DPO. Measures the time from cash paid for inputs to cash received from customers. A shorter CCC means less cash tied up and less financing needed. Assessment Q14: 45 + 30 − 20 = 55 days. Negative CCC (rare — Amazon, Walmart) means customers pay before suppliers are paid — a powerful float advantage.
Days Sales Outstanding (DSO)
Average days to collect from customers after a credit sale: DSO = Accounts Receivable ÷ (Annual Sales/365). Measures the efficiency of the receivables collection process. High DSO means cash is tied up in uncollected invoices. Goal: minimize through prompt invoicing, clear credit terms, and active follow-up. A rising DSO often signals deteriorating credit quality among customers.
Days Inventory Outstanding (DIO)
Average days inventory is held before being sold: DIO = Inventory ÷ (COGS/365). Measures inventory turnover efficiency. High DIO means cash is tied up in sitting stock (plus carrying costs — storage, spoilage, obsolescence). Goal: minimize through better demand forecasting, JIT ordering, and EOQ optimization. Very low DIO can indicate stockout risk if inventory is too lean.
Days Payable Outstanding (DPO)
Average days a company takes to pay its suppliers: DPO = Accounts Payable ÷ (COGS/365). Represents free financing from suppliers — the longer you can defer payment within allowed terms, the more cash is temporarily available for other uses. Goal: maximize within supplier terms (but never damage supplier relationships or miss early-pay discounts that cost more to forgo). Subtracted in CCC formula because it reduces the net cash tied-up period.
Accounts Receivable
Money owed to the business by customers who purchased on credit. A current asset that is not yet cash — it carries collection risk (bad debt) and ties up working capital. Managed through credit policy (who gets credit and on what terms), invoicing speed, and collections processes. An aging schedule categorizes receivables by how long they've been outstanding to identify at-risk accounts.
Accounts Payable
Money owed by the business to its suppliers for purchases made on credit. A current liability that represents free short-term financing — the supplier is effectively lending money to the buyer during the payment period. The largest and cheapest source of short-term financing for most small businesses. Strategically managing payment timing (maximizing DPO within terms) reduces the CCC and financing needs.
Line of Credit (LOC)
A pre-approved borrowing facility from a bank or CDFI allowing a business to draw cash up to a set limit as needed, repay it, and borrow again. Unlike a term loan, the business only pays interest on the amount actually borrowed. Ideal for managing seasonal cash flow gaps and bridging timing mismatches between receivables collection and payables due. Typically secured by business assets or personal guarantee for small businesses.
Trade Credit
The most common form of short-term financing — the implicit loan provided by a supplier when it allows a buyer to pay later (net 30, net 60, net 90). Has zero cost if invoices are paid within terms. Has a very high implicit cost if early-pay discounts are available but not taken (e.g., forgoing a 2/10 net 30 discount is equivalent to paying 37%+ annually). For small businesses, maximizing trade credit terms (within the relationship) is the cheapest source of working capital.
Economic Order Quantity (EOQ)
The optimal order quantity that minimizes total inventory costs (ordering costs + carrying costs): EOQ = √(2 × Annual Demand × Order Cost ÷ Carrying Cost per unit). At EOQ, the cost of placing one more order equals the savings in carrying costs from holding less inventory. A practical tool for any product-based BBYM enterprise to determine how much to order at a time to minimize inventory expense.
Just-In-Time (JIT)
An inventory management philosophy that orders materials precisely when needed for production or service delivery, minimizing holding time and carrying costs. Reduces DIO toward zero by eliminating inventory buffer. Requires reliable suppliers, accurate demand forecasting, and strong supplier relationships. Most applicable to BBYM catering/food enterprises where perishable ingredients make carrying costs (spoilage) especially high.
Current Ratio
Current Assets ÷ Current Liabilities. The primary measure of short-term liquidity — how many dollars of current assets cover each dollar of current liabilities. A ratio of 2.0 means $2 in current assets for every $1 of current liabilities. Healthy range: 1.5–3.0. Below 1.0 signals potential default risk; above 3.0+ suggests inefficient use of capital (too much cash or inventory relative to obligations).
Emergency Fund
The personal finance equivalent of business working capital — a liquid cash reserve covering 3–6 months of fixed expenses held in a high-yield savings account. Provides a financial buffer against income disruptions (job loss, illness, reduced hours) without resorting to high-interest debt. Without an emergency fund, temporary disruptions become permanent debt burdens. The most important financial safety net for BBYM community members before any investment activity begins.
Part 5 — Practice Questions
Show all work — these mirror the Unit 14 assessment format exactly
Conceptual Questions
Q1DSO = 45, DIO = 30, DPO = 20. What is the Cash Conversion Cycle? A) 35 days B) 55 days C) 75 days D) 95 days. (Unit 14 assessment question.)▼
Answer: B — 55 days
CCC = DSO + DIO − DPO = 45 + 30 − 20 = 55 days
Why DPO is subtracted: DPO represents free financing from suppliers — for those 20 days, the business has used the inventory/inputs without yet paying for them. This reduces the net number of days the business's own cash is tied up. The longer you can take to pay suppliers (high DPO), the shorter your effective cash cycle.
Common errors: D (95 = 45+30+20) adds instead of subtracting DPO; C (75 = 45+30) forgets DPO entirely; A (35 = 45−30+20 or other miscombination) mixes operations. The formula is always DSO + DIO − DPO.
CCC = DSO + DIO − DPO = 45 + 30 − 20 = 55 days
Why DPO is subtracted: DPO represents free financing from suppliers — for those 20 days, the business has used the inventory/inputs without yet paying for them. This reduces the net number of days the business's own cash is tied up. The longer you can take to pay suppliers (high DPO), the shorter your effective cash cycle.
Common errors: D (95 = 45+30+20) adds instead of subtracting DPO; C (75 = 45+30) forgets DPO entirely; A (35 = 45−30+20 or other miscombination) mixes operations. The formula is always DSO + DIO − DPO.
Q2Explain why a profitable company can go bankrupt. What does this reveal about the importance of working capital management?▼
A profitable company can go bankrupt because profit and cash flow are different things. Profit is an accounting concept measured on the income statement; cash flow is the actual movement of money. A company can be reporting strong profits while running out of cash to pay its bills — this is the "profitable but illiquid" paradox.
How it happens: A rapidly growing business may win many large contracts (high revenue, high profit) but collect slowly from customers (high DSO = 60 days), need to buy supplies upfront (high DIO), and pay suppliers quickly (low DPO). The timing gap means cash flows out (for supplies) long before it flows in (from customer payments). Even with excellent margins, the company may not have enough cash on hand to pay rent, wages, or supplier invoices — and goes bankrupt despite its income statement showing profits.
What this reveals: Working capital management — specifically managing the CCC — is just as critical as profitability for business survival. Many small businesses fail not from lack of customers or margins, but from poor cash flow timing. BBYM enterprises must track cash flow weekly, not just quarterly profits, and maintain a cash buffer (line of credit or reserve) to bridge timing gaps.
How it happens: A rapidly growing business may win many large contracts (high revenue, high profit) but collect slowly from customers (high DSO = 60 days), need to buy supplies upfront (high DIO), and pay suppliers quickly (low DPO). The timing gap means cash flows out (for supplies) long before it flows in (from customer payments). Even with excellent margins, the company may not have enough cash on hand to pay rent, wages, or supplier invoices — and goes bankrupt despite its income statement showing profits.
What this reveals: Working capital management — specifically managing the CCC — is just as critical as profitability for business survival. Many small businesses fail not from lack of customers or margins, but from poor cash flow timing. BBYM enterprises must track cash flow weekly, not just quarterly profits, and maintain a cash buffer (line of credit or reserve) to bridge timing gaps.
Q3A supplier offers terms of "3/15 net 45" — meaning a 3% discount if paid within 15 days, or full payment due in 45 days. Calculate the annualized cost of NOT taking this discount. Should a BBYM enterprise take the discount if it has available cash?▼
Annualized cost of forgoing the discount:
Cost = (Discount % / (1−Discount%)) × (365 / (Net days − Discount days))
= (0.03 / 0.97) × (365 / (45−15))
= 0.03093 × (365/30)
= 0.03093 × 12.167
= 37.6% per year
Interpretation: Choosing to delay payment from day 15 to day 45 (30 extra days of float) costs the equivalent of borrowing at 37.6% annually. Almost no legitimate borrowing source costs this much — even credit cards (18–29%) are cheaper.
Decision: Yes — a BBYM enterprise with available cash should always take this discount. Paying on day 15 to earn a 3% discount is like earning a guaranteed 37.6% annual return on the payment amount. The only reason NOT to take it is if the enterprise has no cash available — in which case it should draw on its CDFI line of credit (at 6–8%) to pay early, capturing a large net benefit.
Cost = (Discount % / (1−Discount%)) × (365 / (Net days − Discount days))
= (0.03 / 0.97) × (365 / (45−15))
= 0.03093 × (365/30)
= 0.03093 × 12.167
= 37.6% per year
Interpretation: Choosing to delay payment from day 15 to day 45 (30 extra days of float) costs the equivalent of borrowing at 37.6% annually. Almost no legitimate borrowing source costs this much — even credit cards (18–29%) are cheaper.
Decision: Yes — a BBYM enterprise with available cash should always take this discount. Paying on day 15 to earn a 3% discount is like earning a guaranteed 37.6% annual return on the payment amount. The only reason NOT to take it is if the enterprise has no cash available — in which case it should draw on its CDFI line of credit (at 6–8%) to pay early, capturing a large net benefit.
Q4Compare the quick ratio and current ratio. Why might a business have a high current ratio but a dangerously low quick ratio? Give a BBYM example.▼
The current ratio = Current Assets ÷ Current Liabilities includes all current assets: cash, receivables, AND inventory.
The quick ratio = (Cash + Receivables) ÷ Current Liabilities excludes inventory.
A business can have a high current ratio but low quick ratio when it holds a large portion of current assets in slow-moving inventory that cannot be quickly converted to cash.
BBYM Heritage Threads Clothing Enterprise Example:
Cash: $500 | Receivables: $800 | Inventory (seasonal garments): $12,000
Current Liabilities: $5,000
Current Ratio = ($500 + $800 + $12,000) / $5,000 = $13,300/$5,000 = 2.66 — looks healthy
Quick Ratio = ($500 + $800) / $5,000 = $1,300/$5,000 = 0.26 — dangerously low!
The enterprise appears liquid on paper (current ratio 2.66) but could not pay its current liabilities with cash and receivables alone. If an invoice comes due today, it cannot be paid without liquidating inventory — which may take weeks at discounted prices. The quick ratio reveals the true immediate liquidity risk that the current ratio masks.
The quick ratio = (Cash + Receivables) ÷ Current Liabilities excludes inventory.
A business can have a high current ratio but low quick ratio when it holds a large portion of current assets in slow-moving inventory that cannot be quickly converted to cash.
BBYM Heritage Threads Clothing Enterprise Example:
Cash: $500 | Receivables: $800 | Inventory (seasonal garments): $12,000
Current Liabilities: $5,000
Current Ratio = ($500 + $800 + $12,000) / $5,000 = $13,300/$5,000 = 2.66 — looks healthy
Quick Ratio = ($500 + $800) / $5,000 = $1,300/$5,000 = 0.26 — dangerously low!
The enterprise appears liquid on paper (current ratio 2.66) but could not pay its current liabilities with cash and receivables alone. If an invoice comes due today, it cannot be paid without liquidating inventory — which may take weeks at discounted prices. The quick ratio reveals the true immediate liquidity risk that the current ratio masks.
Calculation Questions
Q5BBYM Food Truck: Annual sales = $180,000. Accounts Receivable = $18,000. COGS = $90,000. Inventory = $7,500. Accounts Payable = $6,000. Calculate DSO, DIO, DPO, and CCC.▼
DSO = AR / (Sales/365) = $18,000 / ($180,000/365) = $18,000 / $493.15 = 36.5 days
DIO = Inventory / (COGS/365) = $7,500 / ($90,000/365) = $7,500 / $246.58 = 30.4 days
DPO = AP / (COGS/365) = $6,000 / ($90,000/365) = $6,000 / $246.58 = 24.3 days
CCC = DSO + DIO − DPO = 36.5 + 30.4 − 24.3 = 42.6 days
Cash tied up in CCC = 42.6 days × ($90,000/365) = 42.6 × $246.58 = $10,504 constantly locked in the operating cycle. To free this cash, the food truck could target: reducing DSO to 20 days (faster catering invoice collection), DIO to 15 days (JIT ordering), and extending DPO to 35 days → New CCC = 20+15−35 = 0 days — a truly cash-efficient operation.
DIO = Inventory / (COGS/365) = $7,500 / ($90,000/365) = $7,500 / $246.58 = 30.4 days
DPO = AP / (COGS/365) = $6,000 / ($90,000/365) = $6,000 / $246.58 = 24.3 days
CCC = DSO + DIO − DPO = 36.5 + 30.4 − 24.3 = 42.6 days
Cash tied up in CCC = 42.6 days × ($90,000/365) = 42.6 × $246.58 = $10,504 constantly locked in the operating cycle. To free this cash, the food truck could target: reducing DSO to 20 days (faster catering invoice collection), DIO to 15 days (JIT ordering), and extending DPO to 35 days → New CCC = 20+15−35 = 0 days — a truly cash-efficient operation.
Q6Calculate net working capital and the current ratio for a BBYM enterprise: Cash $5,000, AR $8,000, Inventory $3,000, Prepaid $500, AP $4,500, Accrued wages $1,800, Short-term note $2,200. Is this enterprise in a healthy liquidity position?▼
Current Assets = $5,000 + $8,000 + $3,000 + $500 = $16,500
Current Liabilities = $4,500 + $1,800 + $2,200 = $8,500
NWC = $16,500 − $8,500 = $8,000
Current Ratio = $16,500 / $8,500 = 1.94
Quick Ratio = ($5,000 + $8,000) / $8,500 = $13,000/$8,500 = 1.53
Assessment: The enterprise is in a healthy liquidity position. NWC of $8,000 provides a comfortable cushion. Current ratio of 1.94 is in the healthy 1.5–3.0 range — $1.94 in current assets for every $1 of obligations. Quick ratio of 1.53 confirms liquidity even without selling inventory. The enterprise can meet all short-term obligations comfortably. One area to watch: AR of $8,000 is the largest current asset — slow collection could tighten liquidity.
Current Liabilities = $4,500 + $1,800 + $2,200 = $8,500
NWC = $16,500 − $8,500 = $8,000
Current Ratio = $16,500 / $8,500 = 1.94
Quick Ratio = ($5,000 + $8,000) / $8,500 = $13,000/$8,500 = 1.53
Assessment: The enterprise is in a healthy liquidity position. NWC of $8,000 provides a comfortable cushion. Current ratio of 1.94 is in the healthy 1.5–3.0 range — $1.94 in current assets for every $1 of obligations. Quick ratio of 1.53 confirms liquidity even without selling inventory. The enterprise can meet all short-term obligations comfortably. One area to watch: AR of $8,000 is the largest current asset — slow collection could tighten liquidity.
Q7A BBYM community member has monthly fixed expenses of $2,400 (rent $950, car $380, insurance $200, utilities $130, debt minimums $400, food $340). They earn $3,800/month take-home. (a) How much should their 6-month emergency fund be? (b) If they save $350/month, how long to fully fund it? (c) Where should it be held?▼
(a) 6-month emergency fund target = 6 × $2,400 = $14,400
(Monthly surplus = $3,800 − $2,400 = $1,400 available — but not all is saved)
(b) Time to fund = $14,400 / $350/month = 41.1 months ≈ 3.4 years
Milestone check: Minimum 3-month fund ($7,200) achieved in 20.6 months — prioritize reaching this first for basic protection, then continue to 6 months.
(c) High-Yield Savings Account (HYSA):
• Currently earning 4–5% APY — the $14,400 fully funded earns ~$600–$720/year in interest
• FDIC-insured (safe up to $250,000)
• Instantly accessible (1–2 business days transfer)
• Separate from checking account — reduces temptation to spend it
Never in: stocks/ETFs (can lose 30–40% right when an emergency hits), long-term CDs (early withdrawal penalties), or a regular savings account at a big bank (0.01% APY wastes the interest opportunity).
(Monthly surplus = $3,800 − $2,400 = $1,400 available — but not all is saved)
(b) Time to fund = $14,400 / $350/month = 41.1 months ≈ 3.4 years
Milestone check: Minimum 3-month fund ($7,200) achieved in 20.6 months — prioritize reaching this first for basic protection, then continue to 6 months.
(c) High-Yield Savings Account (HYSA):
• Currently earning 4–5% APY — the $14,400 fully funded earns ~$600–$720/year in interest
• FDIC-insured (safe up to $250,000)
• Instantly accessible (1–2 business days transfer)
• Separate from checking account — reduces temptation to spend it
Never in: stocks/ETFs (can lose 30–40% right when an emergency hits), long-term CDs (early withdrawal penalties), or a regular savings account at a big bank (0.01% APY wastes the interest opportunity).
Q8Calculate EOQ for a BBYM food enterprise: Annual demand = 4,380 units. Order cost = $30/order. Carrying cost = $3/unit/year. How many orders per year? What is the DIO if each unit represents 1 day's supply?▼
EOQ = √(2 × Annual Demand × Order Cost / Carrying Cost)
= √(2 × 4,380 × $30 / $3)
= √(262,800 / 3)
= √87,600
= 296 units per order
Orders per year = 4,380 / 296 = 14.8 ≈ 15 orders/year (roughly every 24 days)
Average inventory = EOQ / 2 = 296 / 2 = 148 units (average held between orders)
DIO: If 1 unit = 1 day's supply, average inventory = 148 days' supply → DIO = 148 days — very high.
To reduce DIO, switch to JIT or more frequent smaller orders: ordering 50 units/order × 88 orders/year → average inventory = 25 units → DIO = 25 days. The carrying cost rises but DIO falls dramatically. The EOQ optimizes cost — if DIO reduction is the priority (e.g., for perishables), a JIT approach may dominate despite higher ordering cost.
= √(2 × 4,380 × $30 / $3)
= √(262,800 / 3)
= √87,600
= 296 units per order
Orders per year = 4,380 / 296 = 14.8 ≈ 15 orders/year (roughly every 24 days)
Average inventory = EOQ / 2 = 296 / 2 = 148 units (average held between orders)
DIO: If 1 unit = 1 day's supply, average inventory = 148 days' supply → DIO = 148 days — very high.
To reduce DIO, switch to JIT or more frequent smaller orders: ordering 50 units/order × 88 orders/year → average inventory = 25 units → DIO = 25 days. The carrying cost rises but DIO falls dramatically. The EOQ optimizes cost — if DIO reduction is the priority (e.g., for perishables), a JIT approach may dominate despite higher ordering cost.
Q9A BBYM catering enterprise currently has CCC = 65 days and daily COGS of $500. Management implements three improvements: DSO reduced from 50 to 28 days, DIO reduced from 35 to 20 days, DPO extended from 20 to 35 days. (a) Calculate old and new CCC. (b) Calculate cash freed by the improvements.▼
(a) Old CCC = DSO + DIO − DPO = 50 + 35 − 20 = 65 days ✓ (confirmed)
New CCC = 28 + 20 − 35 = 13 days
(b) Cash freed = (Old CCC − New CCC) × Daily COGS
= (65 − 13) × $500
= 52 × $500
= $26,000 freed
This $26,000 was previously locked in the operating cycle (tied up in receivables, inventory, or not yet offset by payables). The improvements release it as available cash that can be: used to repay the CDFI credit line (saving interest), invested in growth, held as a liquidity reserve, or distributed to the community equity investors. Working capital optimization is essentially free financing — it doesn't require new debt or equity, just operational discipline.
New CCC = 28 + 20 − 35 = 13 days
(b) Cash freed = (Old CCC − New CCC) × Daily COGS
= (65 − 13) × $500
= 52 × $500
= $26,000 freed
This $26,000 was previously locked in the operating cycle (tied up in receivables, inventory, or not yet offset by payables). The improvements release it as available cash that can be: used to repay the CDFI credit line (saving interest), invested in growth, held as a liquidity reserve, or distributed to the community equity investors. Working capital optimization is essentially free financing — it doesn't require new debt or equity, just operational discipline.
Q10The Swanson Initiative evaluates two community enterprises for a $50,000 working capital investment. Enterprise A: CCC = 20 days, current ratio = 2.5, quick ratio = 1.8. Enterprise B: CCC = 80 days, current ratio = 1.8, quick ratio = 0.6. Compare their liquidity profiles and recommend the better investment from a working capital perspective.▼
Enterprise A Liquidity Profile:
CCC = 20 days — excellent: cash cycles back quickly, very little financing needed
Current Ratio = 2.5 — healthy: $2.50 in current assets per $1 of obligations
Quick Ratio = 1.8 — strong: can meet all current liabilities from cash + receivables alone
Overall: Highly liquid, operationally efficient enterprise. The $50K investment goes toward growth activities, not plugging liquidity holes.
Enterprise B Liquidity Profile:
CCC = 80 days — poor: cash is tied up for 80 days on average; requires substantial financing
Current Ratio = 1.8 — borderline adequate
Quick Ratio = 0.6 — warning sign: below 1.0 means current liabilities exceed liquid assets (cash + receivables). Depends heavily on converting inventory to cash to meet obligations.
Overall: Operationally inefficient with liquidity risk. The $50K investment may be absorbed by working capital needs rather than driving growth.
Recommendation: Enterprise A for the Swanson Initiative investment. Enterprise B needs working capital improvement before receiving growth capital — otherwise the investment funds a cash cycle inefficiency rather than community impact. If BBYM invests in B, it should require a working capital improvement plan (CCC target <40 days, quick ratio >1.0 within 12 months) as a condition.
CCC = 20 days — excellent: cash cycles back quickly, very little financing needed
Current Ratio = 2.5 — healthy: $2.50 in current assets per $1 of obligations
Quick Ratio = 1.8 — strong: can meet all current liabilities from cash + receivables alone
Overall: Highly liquid, operationally efficient enterprise. The $50K investment goes toward growth activities, not plugging liquidity holes.
Enterprise B Liquidity Profile:
CCC = 80 days — poor: cash is tied up for 80 days on average; requires substantial financing
Current Ratio = 1.8 — borderline adequate
Quick Ratio = 0.6 — warning sign: below 1.0 means current liabilities exceed liquid assets (cash + receivables). Depends heavily on converting inventory to cash to meet obligations.
Overall: Operationally inefficient with liquidity risk. The $50K investment may be absorbed by working capital needs rather than driving growth.
Recommendation: Enterprise A for the Swanson Initiative investment. Enterprise B needs working capital improvement before receiving growth capital — otherwise the investment funds a cash cycle inefficiency rather than community impact. If BBYM invests in B, it should require a working capital improvement plan (CCC target <40 days, quick ratio >1.0 within 12 months) as a condition.
Q11Connect working capital management to every prior unit in the curriculum. How does CCC link to TVM, interest rates, WACC, and capital budgeting?▼
CCC and TVM (Unit 5): Cash tied up in the CCC has a time value cost. Each day of CCC represents capital that could be earning WACC if it were available for investment. A 55-day CCC on $50,000 means $50,000 × (55/365) × WACC is lost annually in opportunity cost — a direct application of TVM to working capital decisions.
CCC and Interest Rates (Unit 6): If the CCC requires short-term borrowing (line of credit), the interest rate paid on that borrowing is the direct cost. Higher rates (rising Fed funds rate) increase the cost of financing working capital, making CCC reduction more valuable. The 37% cost of forgoing trade discounts is itself an interest rate concept.
CCC and WACC (Unit 10): Investment in working capital (NWC) must earn at least WACC. The NPV of a CCC improvement = PV of cash freed (discounted at WACC) minus cost of implementing the improvement. Good working capital management reduces WACC by reducing financing needs — a shorter CCC means less short-term debt, which means lower total capital cost.
CCC and Capital Budgeting (Unit 11): In NPV analysis, changes in NWC are explicit cash flows. When a business grows revenue, it typically needs more working capital — this "NWC investment" is a negative cash flow in Year 0–1 of any expansion project. Working capital released at the end of a project's life (NWC recovery) is a positive terminal cash flow. Ignoring NWC changes in capital budgeting NPV calculations significantly overstates project returns — a common error for beginning analysts.
Working capital is the connective tissue of the entire curriculum: it is where long-term financial theory meets the practical daily cash management that determines whether a business or household survives.
CCC and Interest Rates (Unit 6): If the CCC requires short-term borrowing (line of credit), the interest rate paid on that borrowing is the direct cost. Higher rates (rising Fed funds rate) increase the cost of financing working capital, making CCC reduction more valuable. The 37% cost of forgoing trade discounts is itself an interest rate concept.
CCC and WACC (Unit 10): Investment in working capital (NWC) must earn at least WACC. The NPV of a CCC improvement = PV of cash freed (discounted at WACC) minus cost of implementing the improvement. Good working capital management reduces WACC by reducing financing needs — a shorter CCC means less short-term debt, which means lower total capital cost.
CCC and Capital Budgeting (Unit 11): In NPV analysis, changes in NWC are explicit cash flows. When a business grows revenue, it typically needs more working capital — this "NWC investment" is a negative cash flow in Year 0–1 of any expansion project. Working capital released at the end of a project's life (NWC recovery) is a positive terminal cash flow. Ignoring NWC changes in capital budgeting NPV calculations significantly overstates project returns — a common error for beginning analysts.
Working capital is the connective tissue of the entire curriculum: it is where long-term financial theory meets the practical daily cash management that determines whether a business or household survives.
Part 6 — Quick Reference Summary
Read this the night before the assessment
Unit 14 in 5 Essential Sentences
Sentence 1
CCC = DSO + DIO − DPO; Assessment Q14: 45 + 30 − 20 = 55 days; shorter CCC = less cash tied up = less financing needed; DPO is subtracted because supplier credit reduces your own cash investment in the cycle.
Sentence 2
NWC = Current Assets − Current Liabilities; Current Ratio = CA/CL (healthy: 1.5–3.0); Quick Ratio = (Cash+AR)/CL (excludes inventory — the most honest liquidity test); a profitable company can still go bankrupt from poor cash flow timing.
Sentence 3
Improve CCC by: reducing DSO (faster collections), reducing DIO (JIT/EOQ ordering), extending DPO (negotiate longer terms); always take early-pay discounts — forgoing 2/10 net 30 costs 37% annually, more than any legitimate loan.
Sentence 4
Short-term financing: trade credit (cheapest — 0% if within terms), CDFI line of credit (4–8%), bank LOC (prime + 1–3%), commercial paper (large corps only); use the cheapest source first and only borrow what the CCC timing gap requires.
Sentence 5
Personal working capital = emergency fund; target 3–6 months of fixed expenses in a high-yield savings account; without it, a car repair or job disruption triggers credit card debt at 20%+ — the emergency fund is the single most important financial tool for BBYM community members.
Must-Know Facts for the Assessment
| Concept / Formula | Answer |
|---|---|
| CCC formula | DSO + DIO − DPO |
| Assessment Q14 answer | 45 + 30 − 20 = 55 days |
| Why DPO is subtracted | Supplier credit = free financing; reduces days your own cash is tied up |
| DSO formula | Accounts Receivable ÷ (Annual Sales / 365) |
| DIO formula | Inventory ÷ (COGS / 365) |
| DPO formula | Accounts Payable ÷ (COGS / 365) |
| NWC formula | Current Assets − Current Liabilities |
| Current Ratio | Current Assets ÷ Current Liabilities (healthy: 1.5–3.0) |
| Quick Ratio | (Cash + Receivables) ÷ Current Liabilities (excludes inventory) |
| Profitable company bankruptcy | Cash flow timing: profit ≠ cash; slow collections + fast payables = cash crisis |
| Trade discount annualized cost | (d/(1−d)) × (365/(net−discount days)); forgoing 2/10 net 30 = 37.2% |
| EOQ formula | √(2 × Annual Demand × Order Cost ÷ Carrying Cost per unit) |
| Emergency fund target | 3–6 months of fixed expenses in HYSA; 9–12 months for single income |
| Best short-term financing source | Trade credit (0% within terms) → CDFI LOC → bank credit → commercial paper (large corps only) |