Why working capital matters more than ever

Amid this turbulence, one factor has become a lifeline for businesses trying to stay resilient and seize growth opportunities: working capital.

By effectively managing and optimizing working capital, companies can maintain liquidity, operate efficiently, and position themselves for long-term success. This blog will explore what makes working capital so critical in today’s economy, break down its components, and offer actionable strategies to optimize it.

Why working capital is a game-changer in today’s economy

Working capital is no longer just a financial metric on a balance sheet. It’s a strategic tool that helps businesses adapt to disruption, capitalize on opportunities, and ensure operational stability. Today, liquidity is the new currency of resilience.

Here’s why working capital plays a pivotal role:

• Maintaining liquidity amid volatility: Economic instability and unpredictable markets can strain a company’s liquidity. Working capital provides businesses with the flexibility to meet obligations like paying employees, covering operational costs, and navigating unforeseen challenges without turning to expensive emergency funding.

• Supporting operational efficiency: Healthy working capital ensures companies can purchase inventory, fulfill orders, and maintain exceptional service levels. This financial flexibility prevents production delays, stock shortages, and diminished customer trust.

• Building resilience during economic shocks: Global supply chain disruptions have exposed the importance of financial agility. Strong working capital allows businesses to weather these disruptions, negotiate better terms with suppliers, and stay competitive—even in challenging times.

• Enabling strategic investments: Optimized working capital can be a driving force behind growth. Whether it’s expanding into new markets, adopting advanced technologies, or making strategic acquisitions, sufficient liquidity empowers organizations to act decisively.

• Enhancing stakeholder confidence: Investors, creditors, and suppliers see working capital as a reflection of financial health and stability. A well-managed position can inspire trust, providing better terms on funding or supply agreements.

Breaking Down the Components of Working Capital

Working capital management revolves around optimizing the Cash Conversion Cycle (CCC)—a foundational metric that measures how quickly a company can turn its investments in inventory and resources into cash flow from sales.

The three levers of the CCC are:

1. Receivables (DSO – Days Sales Outstanding): Timely collections are critical. Delayed payments from customers can choke cash flow, especially during periods of volatility. Businesses can accelerate cash inflows by tightening payment terms, enhancing invoicing processes, or leveraging AR automation tools.

2. Inventory (DIO – Days Inventory Outstanding): Unpredictable supply chain disruptions and fluctuating consumer demands require businesses to strike a balance. Too much inventory ties up cash, while too little risks lost sales. Smarter forecasting and sharper inventory management are key.

3. Payables (DPO – Days Payable Outstanding): Extending supplier payment terms strategically can preserve liquidity. However, this must be balanced with maintaining strong supplier relationships and exploring opportunities like early payment discounts.

Optimizing these three components is challenging, especially in a globalized landscape with multiple ERPs, business units, and jurisdictions at play. Advanced analytics and digital financial platforms are essential for real-time visibility, scenario planning, and agility.

Real-world example: Bray International

The scale of the challenge is clear: in our recent CFO survey, more than 70% of finance leaders across key global markets, including the US, UK, Japan, and France, expressed concern about the impact of supply chain issues on their organizations’ financial health and outlook. In France, that figure reached 80%. The message is clear: volatility is not a passing phase, but a defining feature of today’s business landscape.

To see how optimizing working capital can drive resilience, take a lesson from Bray International. When tariffs disrupted trade relations in the U.S., Bray could have reacted defensively. Instead, they took proactive measures like diversifying manufacturing locations and leveraging liquidity for strategic investments.

By adopting data-driven decision-making and scenario planning, they managed to not only mitigate risks but also turn uncertainty into competitive advantage. Their agility underscores the importance of working capital in dynamic environments.

Strategies for Optimizing Working Capital

Managing working capital effectively is a strategic imperative. Here are actionable steps your business can take today:

1. Streamline accounts receivable

   • Tighten customer payment terms.

   • Automate invoicing and follow-ups to reduce delayed payments.

   • Offer early payment discounts to incentivize faster collections.

2. Optimize inventory management

   • Align inventory closely with demand through regular reviews and demand forecasting.

   • Improve inventory turnover to free up tied-up cash.

   • Avoid overstocking or understocking by refining supply chain visibility.

3. Extend accounts payable periods strategically

   • Negotiate longer payment terms with suppliers to hold onto cash longer.

   • Balance this with maintaining healthy supplier relationships.

   • Explore dynamic discounting opportunities for mutually beneficial arrangements.

4. Leverage technology & automation

   • Use AI-driven tools for real-time cash flow visibility and forecasting.

   • Automate repetitive tasks to reduce inefficiencies.

   • Invest in digital payment platforms for speed and simplicity.

5. Reduce non-essential costs

   • Identify and eliminate inefficiencies in daily operations.

   • Regularly audit expenses and reallocate savings to high-impact initiatives.

Overcoming challenges in working capital management

While working capital optimization is essential, businesses face unique challenges that make it difficult to maintain. Here are some common hurdles:

Rising inflation

Higher costs for raw materials, labor, and logistics directly impact purchasing power. Businesses must adopt efficient procurement processes and limit cost variability.

Supply chain disruptions

Extended lead times and increased inventory holding costs have made efficient inventory management more critical than ever. Strategies like nearshoring and alternative supplier sourcing can offer relief.

Stricter credit terms

Suppliers tightening credit terms puts additional financial pressure on businesses. Companies need to negotiate better payment terms and explore financing options to reduce strain.

Turning uncertainty onto opportunity

Today’s volatile conditions have raised the stakes for working capital management. While the challenges may seem daunting, businesses that view uncertainty as an opportunity for strategic growth can thrive where others retreat.

By focusing on receivables, inventory, and payables, and leveraging technology and strategic insights, businesses can free up cash, reduce costs, and position themselves for long-term success.

From financial flexibility to strategic advantage

Working capital is no longer just a financial metric. It’s a lifeline for businesses navigating modern volatility and an enabler of strategic growth. Companies that treat it as an enterprise-wide priority will emerge stronger, more competitive, and better equipped to seize the opportunities hidden within disruption.

Now’s the time to reimagine how your organization manages its cash flow. With proactive strategies and the right tools, you can transform working capital from a routine financial consideration to a strategic lever for success.