FIN 5013 Module 3 Working Capital and Cash Conversion Cycle Analysis Example

Ten Days Faster, $114 Million Freed: Toro's Working Capital and Cash Conversion Cycle

Student Name

American College of Education

FIN5013: Strategic Financial Management

Module 3 Assignment

Instructor Name

October 25, 2027

Introduction

The ratio analysis in Module 2 found that The Toro Company's operating cash flow rose to $662 million in fiscal 2025 even as its net earnings fell, and that lower inventory and receivables were part of the reason. This paper examines that working capital performance in detail. It defines the cash conversion cycle, calculates its three components for fiscal 2024 and 2025 from Toro's annual report (The Toro Company, 2025), explains the business factors behind the changes, estimates the cash released, reviews research on why working capital matters and recommends targets and safeguards. As a customer who orders Toro equipment and parts each season, I also consider what tighter working capital means for buyers like my golf courses.

The Cash Conversion Cycle

This measure tracks how long money stays locked inside day-to-day operations: the days it takes to sell inventory, plus the days it takes to collect from customers, minus the days it takes to pay suppliers. The fewer days in the cycle, the less money the business must lock up just to keep running. Each piece is a balance turned into days: stock on hand against a year of product costs, money owed by customers against a year of sales, and money owed to suppliers against a year of product costs, each multiplied by 365. Because Toro's business is seasonal, the paper reports both year-end figures, which are easy to compare, and averages of the beginning and end of fiscal 2025, which smooth some of the swings. Each component also tells a different story: inventory days reflect production planning, receivable days reflect how customers and their lenders pay, and payable days reflect the company's relationships with suppliers.

The Numbers

At the end of fiscal 2024, inventory of $1,039 million equaled about 125 days of the year's cost of goods sold of $3,035 million; receivables of $460 million equaled about 37 days of sales of $4,584 million; and payables of $453 million equaled about 55 days. The cycle was about 107 days. At the end of fiscal 2025, inventory of $921 million equaled about 112 days of cost of goods sold of $3,006 million; receivables of $378 million equaled about 31 days of sales of $4,510 million; and payables of $368 million equaled about 45 days. The cycle was about 98 days, roughly ten days shorter. Using averages for fiscal 2025, the cycle was about 103 days: 34 days of receivables plus 119 days of inventory less 50 days of payables.

Cash Released

The balance sheet changes translate directly into cash. Inventory fell by about $118 million and receivables by about $82 million, together releasing about $200 million. Payables fell by about $85 million, which used cash, because the company paid suppliers more quickly or bought less. The net effect was about $114 million of cash released from these three accounts in fiscal 2025. That amount accounts for much of the gap between net earnings of $316 million and operating cash flow of $662 million, alongside non-cash charges such as depreciation and the trade name impairment. A useful rule of thumb follows from the figures: each day of inventory is worth about $8 million of cash, and each day of receivables about $12 million.

What Drove the Changes

Three business factors explain the movements. First, lower Residential sales and caution among dealers led Toro to produce less, and the annual report notes that field inventory, held by dealers and distributors, was lower at year end. Second, Toro's arrangement with Red Iron Acceptance, its floor plan joint venture with a Huntington bank subsidiary, finances much of dealers' inventory, so Toro is paid relatively quickly once products ship to financed dealers, which keeps its own receivables modest. Third, lower production meant fewer purchases of components and steel near year end, which reduced payables. The fall in payables is therefore partly a mirror of the fall in inventory rather than a deliberate change in supplier terms.

Why Working Capital Matters

Research links working capital to performance and value. Deloof (2003), studying large Belgian firms, found a negative relationship between gross operating income and the number of days of receivables, inventory and payables, suggesting that managers can raise profitability by reducing receivable and inventory days. Kieschnick et al. (2013), studying American firms, found that shareholders, on average, valued a dollar tied up in receivables and stock below a dollar sitting in the bank, which means working capital the business does not need costs owners money. Both findings support Toro's direction in fiscal 2025, with a caution: cutting inventory too far can cost sales, especially for a seasonal business whose customers buy in short windows.

The Customer's View

From the customer side, Toro's tighter inventory has had visible effects. Our dealer has asked us to place orders for spring mowers and irrigation parts earlier than in past years, and a few replacement parts took longer to arrive during the summer. Those changes are consistent with a manufacturer holding less stock and relying more on dealers' financed inventory. For a golf course, a mower that is down for a week in June is costly, so the risk of cutting inventory too deeply is real. Any working capital target should protect parts availability for professional customers, the segment Toro's strategy depends on.

Recommended Targets

I recommend that Toro aim for a year-end cash conversion cycle of about 90 days by fiscal 2027, eight days shorter than fiscal 2025, with most of the improvement in inventory. Reducing year-end inventory by about eight days of cost of goods sold would release roughly $65 million. The AMP program's route-to-market and supply-base work offers the means, for example by shortening lead times from suppliers so less safety stock is needed. Receivables are already low and depend on the floor plan arrangement, so the target there is to hold near 31 days. Payables should not be stretched aggressively, since squeezing suppliers who are themselves under cost pressure could raise prices or disrupt supply.

Safeguards

Three safeguards would keep the targets from harming the business. First, inventory reductions should exclude service parts for professional equipment, with a fill-rate goal for parts tracked alongside the cycle. Second, the company should monitor dealers' field inventory as well as its own, since pushing inventory onto dealers only moves the problem. Third, the Tornado acquisition, completed after year end, will add its own inventory and receivables, so targets should be restated to include it rather than letting the acquisition mask or distort the trend. The board should see the cycle and the parts fill rate on the same page each quarter, so that a better number in one is never bought with a worse number in the other.

Conclusion

Toro's cash conversion cycle shortened by about ten days at year end in fiscal 2025, releasing about $114 million of cash from inventory, receivables and payables, much of it through lower production and dealer floor plan financing. Research supports reducing excess working capital, and a target of about 90 days by fiscal 2027 is achievable mainly through inventory, provided parts availability for professional customers is protected. Module 4 will examine how Toro funds its business beyond working capital.

References

Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573-588. https://doi.org/10.1111/1468-5957.00008

Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders' wealth. Review of Finance, 17(5), 1827-1852. https://doi.org/10.1093/rof/rfs043

The Toro Company. (2025). Form 10-K for the fiscal year ended October 31, 2025. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/737758/000073775825000115/ttc-20251031.htm