Working Capital Optimization Analysis

Calculate Cash Conversion Cycle (CCC) and identify improvement opportunities:

CCC = DSO + DIO - DPO

Where:
- DSO (Days Sales Outstanding) = (Accounts Receivable / Revenue) × 365
- DIO (Days Inventory Outstanding) = (Inventory / COGS) × 365  
- DPO (Days Payable Outstanding) = (Accounts Payable / COGS) × 365

Example calculation:

• DSO: 45 days, DIO: 60 days, DPO: 30 days
• CCC = 45 + 60 - 30 = 75 days
• Revenue $100M → Daily revenue $274K → Cash trapped: $20.5M

Progress:

• Step 1: Calculate current CCC components and 3-year trend
• Step 2: Benchmark against industry peers (top quartile targets)
• Step 3: Analyze top 10 customers (DSO impact) and vendors (DPO impact)
• Step 4: Quantify cash release scenarios (5, 10, 15-day improvements)
• Step 5: Create implementation roadmap with quick wins

Detailed Analysis Steps

1. Component Analysis

• Calculate monthly DSO, DIO, DPO for last 36 months
• Identify seasonal patterns and outliers
• Rank components by cash impact potential

2. Peer Benchmarking

• Compare to industry median and top quartile
• Identify which component offers greatest improvement opportunity
• Set realistic targets based on peer performance

3. Customer/Vendor Deep Dive

• Top 10 customers by receivables balance and payment terms
• Top 10 vendors by payables balance and payment terms
• Calculate individual impact on DSO/DPO

4. Cash Impact Modeling Create scenarios for each component improvement:

Example 1: Input: Manufacturing company, $500M revenue, DSO 52 days, DIO 85 days, DPO 35 days Output:

• Current CCC: 102 days
• Industry benchmark: 75 days
• Cash trapped: $139M excess vs. benchmark
• 10-day improvement across all components releases $41M cash

Example 2: Input: Tech services firm, $50M revenue, heavy customer concentration Output:

• Top 3 customers represent 60% of receivables
• Largest customer pays in 75 days vs. 30-day terms
• Negotiating payment terms with top customer alone releases $2.1M

Analysis Approach:

• Start with biggest cash impact opportunities first
• Focus on top 20% of customers/vendors (80/20 rule applies)
• Consider seasonal business patterns in targets
• Include credit risk assessment in customer payment term changes

Quick Wins Identification:

• Invoice accuracy improvements (reduce disputes)
• Electronic invoicing implementation
• Supplier payment term renegotiation
• Inventory slow-moving/obsolete cleanup

Implementation Roadmap:

• Phase 1 (0-90 days): Process improvements, low-hanging fruit
• Phase 2 (90-180 days): System implementations, term renegotiations
• Phase 3 (180+ days): Strategic changes, supplier/customer mix optimization

• Ignoring business impact: Don't optimize DSO at expense of customer relationships
• One-size-fits-all approach: Different customer segments need different strategies
• Forgetting cash costs: Factor in early payment discounts and financing costs
• Static analysis: Working capital is dynamic - build ongoing monitoring
• Unrealistic targets: Benchmark appropriately for industry and business model
• Missing implementation details: Vague recommendations without clear ownership and timelines

Red Flags:

• Improving one metric while others deteriorate
• Setting targets without operational feasibility assessment
• Ignoring seasonal working capital requirements
• Not modeling P&L impact of changes (e.g., early payment discounts)