Working Capital Management: The Complete Guide
Free cash, fuel growth, and build resilience with proven strategies for managing receivables, inventory, and payables.
Rule of thumb: Every 1 day improvement in CCC releases roughly €(AR + Inventory − AP) ÷ 365 per day.
Working capital is the fuel that keeps a company's operating engine running. Managed well, it lowers funding costs, stabilizes supply chains, and releases cash for strategic bets. Managed poorly, it hides operational waste, amplifies shocks, and forces difficult trade-offs between growth and liquidity.
What You'll Learn
- Clear definitions for DSO, DPO, DIO, and Cash Conversion Cycle
- Practical diagnostic to identify cash bottlenecks
- Proven strategies across receivables, inventory, and payables
- Modern operating model, RACI, and analytics toolkit
Implementation Ready
Get started with our 30/90/365-day roadmap and interactive calculator to quantify your cash opportunity immediately.
Check Your Company's HealthWorking capital is the capital tied up in day-to-day operations, primarily Accounts Receivable (AR), Inventory, and Accounts Payable (AP). Here are the key metrics every leadership team should track:
Days Sales Outstanding (DSO)
Average number of days to collect cash after a sale. Lower is better.
Days Inventory Outstanding (DIO)
Average days inventory sits before being sold. Lower indicates leaner stock.
Days Payables Outstanding (DPO)
Average days you take to pay suppliers. Higher provides more financing.
Cash Conversion Cycle (CCC)
End-to-end cash "round trip." Smaller (even negative) is better.
Why Working Capital Punches Above Its Weight
- Cash released is cash you don't have to borrow — each day improvement reduces funding needs.
- It’s a resilience lever — cushions supply shocks and demand swings.
- It reveals operational truth — bottlenecks expose pricing, forecasting, or process issues.
Price time in cash to keep debates grounded:
- AR one-day value = AR ÷ 365
- Inventory one-day value = Inventory ÷ 365
- AP one-day value = COGS ÷ 365 (payables funding)
- CCC cash impact (per day) ≈ (AR + Inventory − AP) ÷ 365
Example: If AR=€30M, Inventory=€20M, AP=€18M → 1 day ≈ €(30+20−18)/365 ≈ €87,671.
These are directional only; confirm with audited peers, geography, and contract norms.
Start with baseline KPIs and pressure-test against:
- Internal history
- Peer benchmarks
- Industry standards
Company-level KPIs hide variability. Slice by:
- Customer segments
- Product/SKU categories
- Supplier relationships
- Geographic regions
Use process reviews to find failure modes:
- Quote-to-cash issues
- Plan-to-produce gaps
- Procure-to-pay delays
- Evidence-based terms: align payment terms to behavior and norms.
- Risk-weighted credit limits: combine payment history + external data.
- Proactive renewals: refresh limits at renewal or behavior change.
- No PO, no invoice: mandatory PO/contract references.
- E-invoicing by default: reduce errors and cycle time.
- Straight-through cash app: auto-capture remittance data.
- Segment work: prioritize by risk/value; assign owners.
- Dunning cadence by risk tier: friendly nudge → reminder → escalation with SLAs.
- Dispute triage: same-day handling for short-pays and disputes.
- Fact-based conversations: quantify impact in the customer’s language.
- Demand design: statistics + sales intelligence.
- ABC/XYZ segmentation: targets by volatility & value.
- Shorten frozen windows: smaller buckets, frequent S&OP.
- SKU rationalization: eliminate low-velocity variants.
- Make-to-order: configure slow-movers/custom items.
- Lead-time compression: reset timing and lot sizes.
- Real-time accuracy: cycle counts & location discipline.
- Aging governance: R/Y/G dashboards with burn-down plans.
- Explicit decisions: anchor to service economics.
- Benchmark by category: differentiate strategic vs. commodity terms.
- Supply-chain finance (SCF): extend terms with supplier discounting optionality.
- Dynamic discounting: pay early for discounts when cash-rich.
- PO discipline: early, accurate POs for 3-way match.
- Automated approvals: risk-tiered routing to avoid delays.
- Supplier portals: self-service invoices & disputes.
EU Late Payment Directive Note
As of today: the EU Late Payment rules set ~30 days as standard; longer may be possible if expressly agreed and not “grossly unfair.” Check current rules and sector specifics with counsel before extending DPO materially.
Supplier Health Guardrails
- Track on-time/in-full, defect rate, and lead-time drift.
- Use SCF/dynamic discounting to avoid starving critical suppliers.
- Flag term outliers for periodic review.
Collections SLAs (DSO)
- Risk-tiered dunning cadence with tone & timing playbook.
- Dispute SLA: acknowledge same day; resolve in 5 business days.
- Escalation RACI: Sales Ops → Finance Lead → Exec Sponsor.
- Cash council: bi-weekly cross-functional forum (CFO-led).
- Owner per lever: exec sponsors for AR, Inventory, AP.
- Policy with escalation: written, tracked, enforced.
- Driver-based dashboards: dispute aging, forecast error, exceptions.
- Cohort analysis: track behavior changes over time.
- Benchmarking: external references to calibrate ambition.
- Cash KPIs in performance: DSO, DIO, DPO in scorecards.
- “Cash war room” sprints: daily standups, heat maps, targets.
- Continuous improvement: automate insight-to-action loops.
- Stand up cash council with targets.
- Baseline KPIs; segment by customer/product/supplier.
- Launch fast lanes: billing accuracy, dispute triage, slow-move burn-down.
- Publish “one-day value” leaderboard.
- Finalize credit & terms policy with escalation.
- Roll out e-invoicing to priority customers.
- Pilot dynamic discounting/SCF in one category.
- Driver-based dashboards with weekly targets.
- Expand automation across cash application & matching.
- Industrialize S&OP with scenario planning.
- Integrate cash KPIs into performance management.
- Refresh benchmarks and raise ambition.
Driven by order capture fixes, e-invoicing for top 30 accounts, same-day dispute lane, and 11% tail SKU rationalization.
Through ABC/XYZ segmentation, supplier lead-time resets, term harmonization, and dynamic discounting.
Should we target negative CCC?
It depends. Retailers often run negative CCC as they collect at sale while paying suppliers later. Capital-goods makers may not. Anchor on peer benchmarks and risk appetite.
We’re in the EU. Can we push DPO beyond 30 days?
The EU Late Payment rules set ~30 days as standard, allowing longer only when expressly agreed and not “grossly unfair.” Legal and reputational risks rise with excessive extensions.
Are early-payment discounts worth it?
Often yes, if the implied annualized return beats your alternative use of cash and you target the right customers. Pair with e-invoicing and clean billing.
How do we avoid starving suppliers?
Use SCF and dynamic discounting to give suppliers optional liquidity at your spread. Monitor supplier health, lead times, and quality—aim for mutual resilience.
Quantify
- Compute DSO, DIO, DPO, CCC (12-month view).
- Calculate one-day values (AR / 365, Inventory / 365, COGS / 365).
- Translate target improvements into € impact.
Localize
- Segment AR by risk and customer value.
- ABC/XYZ inventory; flag slow/obsolete stock.
- Map supplier terms by category; flag outliers.
Explain & Act
- Identify root causes in Q2C, P2P, P2P (plan-to-produce).
- Stand up fast lanes (billing, disputes, slow-move burn-down).
- Set weekly targets and owners (RACI).
Ready to Turn Insight Into Action?
Use our interactive calculator to quantify your working capital opportunity and track progress.
Closing Thought
Working capital management is not a finance side-project; it is a company-wide operating system for resilience and growth. When leadership treats cash as everyone's job, when Sales closes clean orders, Operations plans to real demand, Procurement sets fair terms with clean execution, and Finance provides simple rules and great data, cash accelerates, cost falls, and risk declines. That is the compounding power of disciplined working capital.