Understanding how money moves through a business is crucial in many consulting cases—especially in operations, retail, and turnaround scenarios. Three concepts come up repeatedly: working capital, inventory management, and cash flow.
This article breaks down how to interpret these terms, calculate them in interviews, and use them to identify operational or liquidity issues.
1. What Is Working Capital?
Working capital = Current Assets – Current Liabilities
It reflects a company’s short-term liquidity—its ability to meet operational needs. A positive number means the company can pay its obligations; a negative number may signal cash problems.
“Our client has $5M in inventory, $3M in receivables, and $4M in payables. What’s their net working capital?” → Answer: $4M
2. Components of Working Capital
- Inventory: Goods held for sale or production
- Accounts receivable (AR): Sales made but not yet collected
- Accounts payable (AP): Bills due to suppliers
Changes in these accounts impact cash flow.
3. Why It Matters
Even profitable companies can face cash crunches if working capital is mismanaged. For example:
- High inventory = cash tied up
- Slow AR collection = delayed inflows
- Low AP = paying suppliers too quickly
“The client is profitable but facing cash issues—investigate working capital.”
4. Inventory Turns
A key operational metric: Inventory Turnover = COGS / Average Inventory
Higher turnover = more efficient use of stock. Lower turnover may indicate overstocking, obsolete products, or poor forecasting.
“With $10M COGS and $2M inventory, turnover = 5x → they replenish stock every 73 days.”
5. Cash Conversion Cycle (CCC)
The CCC measures how long cash is tied up in operations. It combines:
- Days Inventory Outstanding (DIO): Inventory / COGS per day
- Days Sales Outstanding (DSO): AR / Sales per day
- Days Payable Outstanding (DPO): AP / COGS per day
CCC = DIO + DSO – DPO
A lower CCC means faster cash recovery. Reducing CCC can free up significant working capital.
6. Common Interview Scenarios
- Retail client: Why is cash flow down despite rising sales? → Check inventory and AR
- Manufacturing case: How can we improve liquidity? → Extend AP terms or improve DSO
- PE case: Where can we unlock cash post-acquisition? → Optimize working capital
Final Thoughts
In cases where money seems “missing,” always look at working capital. Inventory, receivables, and payables can make or break cash flow—regardless of profitability.
If you can connect operational levers to cash outcomes, you’ll demonstrate both analytical depth and business judgment.