FIN.3:4.1 - Recover the operating cycle before trying to shorten it

Working capital arises because buying, producing, delivering, invoicing and collecting occur at different times. Model the arrangement that creates those times: quantity and price of purchases, stock held before use or sale, credit granted to customers and credit received from suppliers. FIN.4 connects that operating plan to balances and cash. FIN.3 compares changes to the arrangement and their financial consequences.

Begin with the actual cause of the cash tied up. Slow collections may result from a generous credit term, disputed quality, late invoicing or a customer unable to pay. High inventory may be a seasonal build, a supply-protection choice, a production bottleneck or unsalable stock. Those causes call for different actions. Renegotiating payment terms cannot repair an invalid invoice, and writing off obsolete stock does not release the cash spent to acquire it. Inspect sufficiently detailed product, customer and supplier groups before applying an average policy to unlike cases.

The relevant operating alternative must still perform its intended service. Obtain a feasible replenishment or capacity response from operations and its resource/cost consequences from MA. A finance practitioner can compare those responses without inventing an inventory-control or production method. When no alternative operating plan is supplied, report the missing delivery or service condition instead of labeling the lowest stock balance optimal.