Working Capital Management

Working capital management is the art of balancing growth with liquidity. Commodity trading ties up enormous amounts of capital, and managing this effectively is essential for both profitability and survival.

The Cash Conversion Cycle

Understanding the Cycle

CASH CONVERSION CYCLE
─────────────────────

                Purchase              Sale              Collection
                   │                    │                    │
Day 0              ▼                    │                    │
            PAY SUPPLIER                │                    │
                                        │                    │
Day 30                                  ▼                    │
                               DELIVER TO BUYER              │
                                                             │
Day 60                                                       ▼
                                                    RECEIVE PAYMENT

CASH CONVERSION CYCLE = 60 DAYS

FORMULA:
CCC = DIO + DSO - DPO

Where:
DIO = Days Inventory Outstanding (30 days)
DSO = Days Sales Outstanding (30 days)
DPO = Days Payable Outstanding (0 days, if paid on purchase)

CCC = 30 + 30 - 0 = 60 days

Impact of CCC on Capital

WORKING CAPITAL REQUIREMENT
───────────────────────────

DAILY PURCHASES: $10M
CASH CONVERSION CYCLE: 60 days

WORKING CAPITAL NEEDED:
$10M × 60 = $600M

IF CYCLE EXTENDS TO 75 DAYS:
$10M × 75 = $750M
Additional: $150M

IF CYCLE SHORTENS TO 45 DAYS:
$10M × 45 = $450M
Savings: $150M

CONCLUSION:
Every day of cycle = $10M more/less capital needed

Optimizing Each Component

Days Inventory Outstanding (DIO)

INVENTORY OPTIMIZATION
──────────────────────

CURRENT STATE:
Average inventory: $300M
Annual cost of goods: $3.65B
DIO: 300/(3,650/365) = 30 days

REDUCTION STRATEGIES:
1. Just-in-time purchasing
2. Better demand forecasting
3. Faster vessel turns
4. Reduce safety stock

TARGET:
Reduce DIO by 5 days
New inventory: $250M
Capital released: $50M

CAUTION:
Too lean = stockouts = lost sales
Balance is key

Days Sales Outstanding (DSO)

RECEIVABLES OPTIMIZATION
────────────────────────

CURRENT STATE:
Accounts receivable: $300M
Annual sales: $3.65B
DSO: 300/(3,650/365) = 30 days

REDUCTION STRATEGIES:
1. L/C at sight (vs. deferred)
2. Prompt invoicing
3. Collection follow-up
4. Early payment discounts
5. Factoring/receivables finance

TARGET:
Reduce DSO by 7 days
New receivables: $230M
Capital released: $70M

L/C IMPACT:
Open account: 45 days DSO
L/C at sight: 10 days DSO
Difference: 35 days capital freed

Days Payable Outstanding (DPO)

PAYABLES OPTIMIZATION
─────────────────────

CURRENT STATE:
Accounts payable: $100M
Annual purchases: $3.65B
DPO: 100/(3,650/365) = 10 days

EXTENSION STRATEGIES:
1. Negotiate longer terms
2. Early payment discount analysis
3. Supply chain finance programs
4. Strategic payment timing

TARGET:
Extend DPO by 10 days
New payables: $200M
Capital benefit: $100M

EARLY PAYMENT DISCOUNT ANALYSIS:
Terms: 2/10 net 30
Discount: 2% for paying 20 days early
Annualized cost of not taking: 36.7%
If borrowing cost < 36.7%: TAKE DISCOUNT

Cash Flow Forecasting

Forecasting Framework

CASH FLOW FORECAST
──────────────────

WEEKLY CASH FLOW PROJECTION

              Week 1   Week 2   Week 3   Week 4
─────────────────────────────────────────────────
OPENING CASH     50       45       30       55

INFLOWS:
Collections      60       70       75       80
L/C drawdowns     0       20        0        0
─────────────────────────────────────────────────
Total inflows    60       90       75       80

OUTFLOWS:
Purchases       (55)     (90)     (40)     (60)
Freight         (5)      (10)     (5)      (5)
Overheads       (5)       (5)     (5)      (5)
─────────────────────────────────────────────────
Total outflows  (65)    (105)     (50)     (70)

NET FLOW        (5)      (15)      25       10

CLOSING CASH     45       30       55       65

Stress Testing

LIQUIDITY STRESS TEST
─────────────────────

SCENARIO:
Major buyer defaults on $50M payment

IMPACT:
Week 1 collections: -$50M
Cash position: Goes negative

MITIGATION OPTIONS:
1. Draw on RCF: $50M available
2. Factor other receivables
3. Delay supplier payment
4. Accelerate other collections

POLICY:
Maintain minimum cash buffer of 2 weeks' payments
Current: $100M minimum cash

Capital Allocation

By Business Line

CAPITAL ALLOCATION FRAMEWORK
────────────────────────────

TOTAL CAPITAL: $2B

ALLOCATION BY DESK:
Crude oil: $800M (40%)
Products: $400M (20%)
Metals: $400M (20%)
Agriculture: $300M (15%)
Other: $100M (5%)

RETURN REQUIREMENTS:
Crude: 15% ROACE minimum
Products: 18% ROACE minimum
Metals: 15% ROACE minimum
Agriculture: 12% ROACE minimum

REALLOCATION:
Quarterly review
Underperforming desks lose capital
Outperforming desks gain capital

Return on Capital Employed

ROACE CALCULATION
─────────────────

FORMULA:
ROACE = EBIT / Average Capital Employed

EXAMPLE:
EBIT: $300M
Capital employed: $2B
ROACE: 15%

BY TRADE:
Trade profit: $2M
Capital tied: $100M for 60 days
Annualized capital: $100M × (60/365) = $16.4M
ROACE: $2M × (365/60) / $100M = 12.2%

HURDLE RATE:
Cost of capital: 8-10%
Target ROACE: 15-25%
Minimum acceptable: 10%

Inventory Financing

Warehouse Financing

WAREHOUSE FINANCING STRUCTURE
─────────────────────────────

SETUP:
Commodity stored in approved warehouse
Bank takes security interest in inventory
Advances against warehouse receipt

ECONOMICS:
Inventory value: $100M
Advance rate: 80%
Financing available: $80M
Interest: SOFR + 150 bps

MONITORING:
Warehouse issues daily stock reports
Bank monitors value (mark-to-market)
If value falls → margin call

BENEFIT:
Frees capital vs owning outright
Cost: ~2% per annum

Repo Financing

COMMODITY REPO
──────────────

STRUCTURE:
Day 0: Sell commodity to bank @ $98M
Day 0: Agree to repurchase @ $100M in 30 days

ECONOMICS:
Implied interest: ($100-$98)/$98 × (365/30) = 24.8%
(Expensive! Used only for short-term needs)

WHEN USED:
Bridge financing
Unexpected cash need
Better than selling at discount

Treasury Operations

Cash Management

TREASURY FUNCTION
─────────────────

RESPONSIBILITIES:
1. Cash forecasting
2. Funding decisions
3. Investment of surplus
4. FX management
5. Bank relationship management
6. Hedge coordination

TYPICAL STRUCTURE:
Group Treasurer
├── Cash Manager
│   ├── Daily cash positioning
│   └── Short-term investments
├── Funding Manager
│   ├── Bank facilities
│   └── Debt management
└── FX/Hedge Coordinator
    ├── Currency hedging
    └── Interest rate hedging

Intraday Cash Management

DAILY CASH ROUTINE
──────────────────

07:00 - Review overnight positions
        Check bank balances globally

08:00 - Morning funding meeting
        Review day's expected flows
        Identify funding needs/surplus

09:00 - Execute funding
        Draw on facilities if needed
        Invest surplus if available

12:00 - Mid-day update
        Track actual vs forecast
        Adjust as needed

15:00 - End of day positioning
        Final transfers
        Set up overnight positions

17:00 - Report to management
        Day's summary
        Next day forecast

Key Metrics

Working Capital KPIs

Metric	Formula	Target
CCC	DIO + DSO - DPO	< 45 days
Current ratio	CA / CL	> 1.2
Quick ratio	(CA - Inventory) / CL	> 0.8
Working capital turnover	Revenue / WC	> 10x
Cash ratio	Cash / CL	> 0.15

Dashboard Example

WORKING CAPITAL DASHBOARD
─────────────────────────

METRIC                 ACTUAL    TARGET    STATUS
──────────────────────────────────────────────────
Cash Conversion Cycle   52 days   45 days   ⚠️
Current Ratio           1.35      1.20      ✓
Quick Ratio             0.92      0.80      ✓
Working Capital ($M)    450       400       ✓
ROACE                   18%       15%       ✓
Facility Utilization    65%       <80%      ✓
Headroom ($M)          525       >300      ✓

Key Takeaways

CCC determines capital need — Shorter cycle = less capital
Each component is optimizable — DIO, DSO, DPO
Forecasting prevents surprises — Daily cash visibility
ROACE measures efficiency — Capital must earn its cost
Stress testing is essential — Prepare for defaults
Treasury is a core function — Not just back office

References

Treasury Management Association
Corporate treasury best practices
Trade finance working capital guides
EY/PwC treasury surveys