Which aspect of working capital is crucial for enhancing free cash flow?

Maximizing receivables turnover is crucial for enhancing free cash flow because it directly impacts how quickly a company can convert its credit sales into cash. A higher receivables turnover ratio indicates that a company is efficient in collecting its outstanding debts from customers. Faster collection of receivables means that cash is available sooner for operational needs, investments, or returning to shareholders, ultimately improving free cash flow.

Free cash flow represents the cash a company generates after accounting for cash outflows to support operations and maintain capital expenditures. By ensuring that receivables are collected quickly, a company can reduce the cash cycle, leading to more available cash, which can be used for various purposes such as paying dividends, reinvesting, or reducing debt.

In contrast, while reducing overhead costs can lead to improved profitability, it does not directly influence cash conversion from sales. Similarly, increasing fixed asset investments typically ties up cash rather than enhancing it, and improving employee compensation packages, although beneficial for employee satisfaction and retention, may not have an immediate positive effect on free cash flow.