Working Capital Secrets

Every dollar tied up in working capital is a dollar you can't use to grow your business, pay down debt, or return to shareholders.

The cash conversion cycle (CCC) measures how long it takes to convert inventory and receivables into cash:

CCC = DIO + DSO - DPO

• DIO (Days Inventory Outstanding): How long inventory sits before sale
• DSO (Days Sales Outstanding): How long it takes to collect receivables
• DPO (Days Payable Outstanding): How long you take to pay vendors

A lower CCC means more cash available for growth. Pairing this visibility with a disciplined cash management process ensures you're deploying that cash intentionally rather than letting it sit idle.

1. Tighten Credit Terms

If you're extending Net 60 or Net 90, consider moving to Net 30 or even Net 15 for new customers. A outsourced accounting team can help you implement credit policies, and a fractional CFO can model the cash flow impact of different credit terms.

2. Invoice Immediately

Don't wait until month-end to invoice. Invoice the moment the work is complete or the product ships.

3. Offer Early Payment Discounts

2/10 Net 30 can accelerate collections significantly. Run the numbers — the discount is often worth it for the cash timing.

4. Implement Automated Collections

Automated reminders at 30, 45, and 60 days post-invoice can reduce DSO by 5-10 days.

5. Require Deposits

For new customers or large projects, require 25-50% upfront to reduce exposure. This is especially important when preparing for an exit process where every dollar of working capital affects valuation. Understanding this connection is key to business valuation for owners planning their exit.

1. Negotiate Payment Terms

Don't accept the vendor's standard terms. Negotiate Net 45 or Net 60 — especially for repeat purchases.

2. Use Your Buying Power

Consolidate vendors to increase volume with fewer suppliers, giving you leverage to negotiate better terms.

3. Time Your Payments

Take full advantage of payment terms. If terms are Net 30, pay on day 30, not day 15.

4. Consider Dynamic Discounting

Some ERPs offer dynamic discounting — take a discount for early payment, but only when you have the cash available.

Effective DPO management requires coordinating AP with the broader treasury management function to ensure you're not leaving supplier relationships damaged by aggressive terms. Effective cash management also coordinates payroll management timing with AP cycles.

1. Reduce Safety Stock

Use demand forecasting to right-size safety stock. Less inventory means less cash tied up. Understanding your financial models for demand planning helps right-size holdings.

2. Implement JIT Where Possible

Just-in-time inventory reduces carrying costs but requires reliable suppliers. Pair this with a disciplined accounting process to track inventory levels accurately.

3. Liquidate Slow-Moving Stock

Identify items with more than 90 days of inventory and consider discounting to move them. Even at reduced margins, liquidating slow-moving stock frees up cash for higher-return opportunities.

4. Improve SKU Rationalization

Fewer SKUs means less inventory to manage and less cash tied up. This connects to broader profitability analysis where you examine which products truly contribute to margins.