Corporate Finance Part 5 - Working Capital Management

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Corporate Finance

Volume 4, Study Session 11 – Reading 40 Working Capital Management.

Welcome to Reading 40 of the Simplilearn CFA Level I tutorial.

The previous lesson covered Dividends and Share Repurchases: Basics. In the previous lesson we started with the concept of  dividends, forms of dividends, dividends payment chronology, concept of share repurchase, methods of share repurchase, financial statement effects of repurchases such as changes in EPS, changes in book value per share and their calculation and valuation equivalence of cash dividends and share repurchases.

In this lesson we will discuss the third reading of this module. The topic of discussion is Working Capital Management.


The agenda of this session is to cover Reading 40 as prescribed by the CFA Level I Curriculum. You can go through this reading from Volume 4 of CFA Level I Curriculum made available to you by CFA Institute.

In this lesson we will learn the concept of working capital management. We will discuss in detail the necessity of working capital management and how to manage the cash and cash conversion cycle to manage liquidity. We will learn about managing and measuring liquidity, sources of liquidity, drags and pulls on liquidity, forecasting short-term cash flows, monitoring cash uses and cash flows, investing short-term funds, short term investment instruments, investment risks, strategies, managing accounts receivable, key elements of the trade credit granting process, managing customer receipts, managing inventory, approaches to managing inventory, inventory costs, managing accounts payable, economics of taking a trade discount and managing cash disbursements. Last we will learn about managing short term financing in case of needs.

As per the learning outcome statement or LOS as defined by CFA Institute, after completion of this lesson a student should be able to describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position, compare a company’s liquidity measures with those of peer companies , evaluate working capital effectiveness of a company based on its operating and cash conversion cycles.