Working Capital: The Forgotten Lever of Liquidity – and the Lost Treasury Generation

The phrase “Cash is King” remains timeless – not only for treasurers, but for every part of the business. Unfortunately, many organizations only rediscover its truth when liquidity is already under pressure, or perilously close to it. Hence an even important part of the toolbox, similar to cash- and risk management, is the Working Capital management.

By having solid working capital measurements as a part of the daily business the Treasurer at all time and proactively can make sure to have enough, but not too much, liquidity available to fund the day to day operations.

Understanding Working Capital

Working capital represents as mentioned the liquidity a company uses to run its daily operations. It is the difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt).

Working Capital = Current Assets – Current Liabilities

A positive working capital position signals that the company can comfortably meet its short-term obligations. A negative position can indicate a liquidity shortfall or dependency on external funding.

As liquidity was the oxygen, the working capital is the financial bloodstream of any organization. It ties together operations, liquidity, and profitability. Managing it efficiently allows companies to unlock cash, reduce financing needs, and strengthen financial resilience.

So for a certain time you can live on reduced or lowered levels of bloodstream, which you might discover, before it impacts your oxygen levels – and then it actually is too late to to anything to the bloodstream.

In the same way the working capital needs to be solid and on the agenda. Maybe not at all times, but without having it as a focus from time to time, it at the end damages the business, or the possibility of running the business.

Impact on the Balance Sheet and Profit & Loss Statement

Balance Sheet View

Working capital sits at the heart of the balance sheet and links operational behavior to liquidity outcomes, and comes from the 3 below parts of the balance sheet.

The Asset side

• Accounts Receivable (AR): Slow-paying customers increase receivables, reducing available cash.
• Inventory: Excess stock inflates current assets but ties up capital in unsold goods.

The Liability side

• Accounts Payable (AP): Delaying supplier payments improves cash on hand but must be balanced to avoid supplier tension.

A disciplined approach to each of these areas can release significant liquidity without altering the company’s revenue or cost structure.

Profit & Loss (P&L) View

Working capital does not appear directly on the income statement, yet its influence on performance is profound. The cash flow from operations, bridging net income and cash generation, reflects movements in receivables, payables, and inventory.

Examples:

• A buildup in receivables reduces operational cash flow.
• Extending payables increases cash flow, even if earnings stay constant.
• Inventory reduction frees cash for other uses without changing EBIT.

Ultimately, effective working capital management amplifies free cash flow, which can be redeployed for dividends, share buybacks, or debt reduction.

Cash Conversion Cycle and Working Capital Days

The Cash Conversion Cycle (CCC) measures the number of days cash is tied up in the business before it returns through sales.

CCC = Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payables Outstanding (DPO)

Each element tells a story:

• DSO is how quickly customers pay the outstanding invoices, hence the days it takes from the invoice is booked as an account receivable to it once again is settled by an incoming payment (or in another way booked away from the balance sheet, e.g. by a credit note posting),
• DIO is how efficiently inventory turns into sales. So for how long does an item “lays” at the inventory, hence for how long time is the item a part of the balance sheet before it will be “shipped” and turned into an account receivable,
• DPO is how long the company takes to pay its suppliers. So in general the days from an invoices is booked to the balance sheet under accounts payable to it is settled by a payment (or in another way booked away from the balance sheet, e.g. by a credit note posting).

Shorter cycles free up cash and longer ones trap it. Tracking working capital days provides early warning signals of stress.  Whether it is overstocked inventory, deteriorating collections, or tightening supplier terms.

A Decade of Unusual Conditions: The Era of Negative Interest Rates

For more than a decade, treasurers operated in an unprecedented environment. Across Europe, Japan, and other markets, negative or near-zero interest rates reversed the traditional rules of liquidity management. Here it is of course not “one size fits all”, as working capital still was a part of the daily work for many treasurers even the low or negative interest rates.

In this world, holding excess cash became a liability rather than an asset. Treasury priorities shifted from a view on “Cash is King” more like to be “Cash is a thieve”, and the implementation of the below became the solution avoiding “the cash stealing your many” in terms of paying negative interests to the banks.

• Paying suppliers early reduced idle cash subject to negative yields.
• Allowing customers to pay later avoided unwanted cash inflows.
• Liquidity buffers seemed unnecessary when borrowing was nearly free.

These behaviors made sense economically but had one side effect, where they weakened working capital discipline across many organizations, and still does.

The Lost Treasury Generation

An entire generation of treasury professionals (those who began their careers between roughly 2010 and 2021) has grown up in a world of persistently low or even negative interest rates. For many, the traditional treasury disciplines of liquidity optimization, funding risk management, and working capital efficiency were more theoretical than practical. These topics were often underemphasized, and as a result, never fully integrated into the everyday treasury toolbox. When the world abruptly returned to a more “normal” rate environment  with policy rates rising at record speed many organizations found themselves unprepared to manage liquidity under these new conditions.

Why It Hurts Today

Companies that neglected working capital optimization might now face:

• Higher borrowing costs as inefficient working capital increases short-term funding needs. Even worse, some companies may now face reduced access to credit, as previously established lines have been withdrawn (either by banks, seeking to eliminate unused facilities that still carry capital requirements, or by companies themselves, aiming to avoid commitment fees once viewed as unnecessary).
• Reduced free cash flow or in some cases, even negative cash flow (driven by customers and suppliers simultaneously tightening their own working capital positions), will ultimately constrain a company’s ability to pay dividends or reinvest internally.
• Tighter liquidity buffers limit flexibility during periods of supply disruption or demand volatility as witnessed in the post-pandemic recovery, when global supply chains struggled to rebuild inventories quickly enough, and demand shifted sharply across product categories.
• Companies may face organizational blind spots when less experienced treasury staff are unable to detect or act on working capital inefficiencies. In some cases, the challenge is even more fundamental if the staff may not yet have a clear understanding of working capital and its strategic importance.

Many treasurers have become highly skilled at managing yield curves, yet less adept at optimizing cash conversion, and as cash regains its value, the gap between companies that maintained working capital discipline and those that neglected it continues to widen.

The Forgotten Link: Supply Chain Finance

The decline in working capital focus during the negative-rate decade also affected supply chain finance (SCF).

Traditionally, SCF programs help buyers and suppliers optimize liquidity together:

• Buyers extend payment terms to improve DPO.
• Suppliers receive early payments at attractive rates through financing intermediaries.

However, when holding cash carried a cost, SCF lost its strategic appeal:

• Corporates preferred to pay early rather than hold negative-yielding balances.
• Many SCF programs stagnated or were used only for relationship management, not liquidity enhancement.

Now that rates are positive again, the economics of SCF have flipped. Treasurers are rediscovering its potential to:

• Preserve working capital without pressuring suppliers.
• Secure liquidity along the supply chain.
• Strengthen resilience in volatile interest and credit environments.

The renewed focus on working capital is reviving SCF as a strategic treasury tool rather than a peripheral financing product.

The Return of Working Capital Discipline

The normalization of interest rates has restored the classic treasury playbook. Liquidity now has value again — and how it is managed can make or break profitability.

Modern treasury teams are once again:

• Tightening receivables management to accelerate inflows.
• Reviewing payment terms and discount structures.
• Implementing dynamic discounting and SCF solutions.
• Integrating working capital KPIs into performance dashboards.

Working capital optimization is no longer a technical exercise; it is a board-level priority tied to shareholder value and corporate agility.

Key Take Away – Rediscovering the Strategic Value of Cash

Working capital sits at the intersection of operations, finance, and strategy. It affects not just liquidity, but resilience, funding costs, and shareholder returns.

The decade of negative interest rates temporarily distorted these priorities — shaping a treasury generation that learned to avoid liquidity rather than optimize it. As global markets return to more conventional rate environments, the pendulum is swinging back.

For today’s treasurers and CFOs, the opportunity is clear:

Rebuild the working capital mindset. Relearn the power of liquidity. Rediscover the value of cash.

Those who do will not only strengthen their company’s financial foundations – they will also redefine treasury excellence for the next generation.