Freeing up the cash tied in working capital

A company can be profitable on paper and still struggle to pay its bills. The income statement says the year went well. The bank account says something else. The gap between the two is usually working capital: the money tied up in goods on the shelf, in invoices customers have not yet paid, and in suppliers who were paid sooner than they needed to be.

This is not a problem only for companies in trouble. Growing companies feel it most, because every extra sale needs more stock and more outstanding invoices before any cash comes back. A business that grows quickly with loose working capital habits can find itself borrowing to fund its own success.

The good news is that working capital is one of the few places where a company can release real cash without cutting anything that customers value. It takes discipline across sales, operations and finance, and it takes a few simple routines. This article walks through how to think about it, where the levers are, and how to make the improvements last.

Why profitable companies run short of cash

Profit and cash measure different things. Profit is recorded when a sale is made and a cost is incurred. Cash moves when money actually changes hands. Between those two moments, cash sits in the business doing nothing.

Three things usually drive the gap:

• Stock that waits. Raw materials, work in progress and finished goods are all cash that has been spent but not yet earned back.
• Customers who pay late. Every day an invoice stays open is a day the company is lending money to its customer, interest free.
• Suppliers paid early. Paying before the agreed due date gives away cash the company could have kept a little longer.

Growth makes all three worse at the same time. More orders mean more stock, more open invoices and more supplier bills. If nothing changes in how these are managed, the cash need grows roughly in line with sales. That is why a strong year can end with a tighter bank balance than a weak one.

The cash conversion cycle in plain words

The cash conversion cycle answers one question: how many days does money spend inside the business between paying a supplier and getting paid by a customer?

It has three parts:

1. Days of inventory. How long goods sit, on average, from when they are bought until they are sold.
2. Days sales outstanding. How long customers take, on average, to pay after they are invoiced.
3. Days payables outstanding. How long the company takes, on average, to pay its own suppliers.

The cycle is days of inventory plus days sales outstanding minus days payables outstanding. The first two keep cash locked up. The third gives some of that time back, because the company is using its suppliers' money while it waits.

Here is a made-up example. Say a wholesale company has annual sales of NOK 100 million and a cost of goods of NOK 70 million. Its goods sit on the shelf for 60 days before they are sold. Customers pay, on average, 55 days after invoicing. The company pays its suppliers after 30 days.

The cycle is 60 plus 55 minus 30, which is 85 days. For 85 days, the company is financing its own operations.

Now look at what each day is worth. One day of sales is about NOK 274,000 (100 million divided by 365). One day of cost of goods is about NOK 192,000 (70 million divided by 365).

• If customers paid ten days faster, the company would free roughly NOK 2.7 million.
• If stock moved ten days faster, it would free roughly NOK 1.9 million.
• If the company paid suppliers on the agreed day instead of early, and that added five days, it would keep roughly NOK 1 million longer.

None of these changes are dramatic on their own. Together they are worth more than many cost programmes, and the cash comes back once, then stays available for as long as the new habits hold.

Working capital is not an accounting topic. It is the sum of hundreds of small daily decisions about selling, buying, storing and invoicing.

Levers in receivables

Receivables are often the quickest place to start, because many of the delays are self-inflicted. A customer cannot pay an invoice that has not been sent, or one that is wrong.

Terms. Start by checking what has actually been agreed. Over time, payment terms tend to drift: a salesperson gives 60 days to win a deal, a key customer asks for 90, and nobody records or reviews it. Make a list of terms by customer and compare it with the standard. Decide which exceptions are worth keeping, and stop granting new ones without approval.

Invoicing speed. Measure the time from delivery, or completed work, to invoice. In many companies it is several days, sometimes weeks, especially for project or service work. Every day of delay adds a day to the cycle. Invoice on delivery where possible, and agree milestone billing for longer projects.

Invoicing accuracy. Wrong prices, missing order numbers and incorrect quantities give customers a reason to hold payment. They also create rework for both sides. Track how many invoices are disputed or credited, and fix the root causes, which are often in order entry or price lists rather than in finance.

Dispute handling. When a customer disputes an invoice, someone needs to own the problem and close it quickly. Disputes that sit in someone's inbox can block payment for weeks. Set a simple rule: every dispute has a named owner and a target date.

Follow-up. Agree a fixed rhythm: a friendly reminder before the due date for larger invoices, a call shortly after, and a clear escalation path. Most customers pay when they are asked clearly and on time. The point is consistency, not pressure.

Levers in inventory

Inventory is where the most cash usually hides, and where the trade-offs are hardest. Too little stock means lost sales and unhappy customers. Too much means cash sitting on a shelf, and often goods that slowly lose their value.

Segmentation. Not all items deserve the same treatment. Sort them by how much they sell and how steady the demand is. Fast, steady sellers can run on lean, regular replenishment. Slow or irregular items may be better ordered to demand, or held centrally. A single rule for every item usually means too much of some and too little of others.

Safety stock. Safety stock protects against uncertainty in demand and delivery times. It should be set by calculation, reviewed regularly and tied to the service level you actually want for each segment. In practice, safety stock is often set once, years ago, and then increased every time someone runs out. Review it item by item, starting with the largest values.

Slow movers. Make a list of items with no or very little movement over the last six or twelve months. For each one, decide: sell it, return it, use it, write it down or keep it for a stated reason. Then look at why it was bought. Slow movers are a symptom of buying decisions that were not linked to demand.

Forecasting. Better forecasts reduce the need for buffers. That does not require advanced tools. It requires a regular meeting where sales, operations and purchasing look at the same numbers, agree what they expect to sell and buy accordingly. Sales knowledge about large orders, campaigns and lost customers is often the missing piece.

Order quantities. Large minimum orders and volume discounts can look attractive on unit price and still cost more in tied-up cash and storage. Compare the discount with the cost of holding the extra stock before accepting it.

Levers in payables

Payables are the most sensitive lever, because they involve someone else's cash. Done badly, stretching payables just moves the problem onto suppliers, damages relationships and can raise prices. Done well, it is mostly about discipline.

Agreed terms. Review supplier terms in the same way as customer terms. Align them with what is normal in your industry, and negotiate openly when they are out of line. A supplier who understands why you are asking is more likely to agree than one who simply sees late payments.

Pay on the due date, not before. Many companies pay invoices as soon as they are approved, which can be weeks early. Paying on the agreed date, no later and no earlier, is fair to suppliers and often frees a meaningful amount of cash.

Payment runs. Set fixed payment runs, for example once or twice a week, and pay what falls due in that window. This makes cash flow easier to predict and reduces ad hoc payments.

Protect smaller suppliers. Some suppliers depend on being paid quickly. Squeezing them can put a critical part of your supply chain at risk. Decide which suppliers should be paid on short terms, and why, and stick to it. Being known as a reliable payer has a value of its own.

Early payment discounts. If a supplier offers a discount for early payment, compare it with what the cash is worth to you. Sometimes taking it is the better deal.

Who owns what

Working capital crosses every department, which is why it often belongs to nobody. Finance sees the numbers, but most of the decisions are made elsewhere.

A practical split looks like this:

• Sales owns customer terms, accurate order information and the customer relationship when an invoice is overdue. Salespeople should know the payment status of their customers.
• Operations and purchasing own stock levels, order quantities, safety stock and supplier terms in practice.
• Finance owns invoicing processes, collection routines, payment runs, the measurement of each part of the cycle and the cash forecast.
• Leadership owns the targets, the trade-offs between service, cost and cash, and the follow-up.

Incentives matter here. If sales are rewarded only on volume and purchasing only on unit price, both will tend to tie up more cash. Consider adding a working capital measure to how these roles are judged, even a simple one.

A 13-week cash forecast

A budget tells you what the year should look like. A 13-week cash forecast tells you what the next quarter will actually look like, week by week. It is one of the most useful tools a company can have, and it does not need special software.

1. Start with today's bank balance. Use the real number, not the book balance.
2. List expected receipts week by week. Base them on open invoices and how each customer actually pays, not on the due date.
3. List expected payments week by week. Payroll, rent, taxes, supplier payment runs, loan payments and larger planned purchases.
4. Calculate the closing balance for each week. This shows where the low points are, often well before they arrive.
5. Roll it forward every week. Drop the past week, add a new week at the end and compare the forecast with what actually happened.

The comparison is where the learning is. If receipts keep coming in later than expected, the collection process needs attention. If payments are higher than planned, someone is buying outside the plan. After a few months, the forecast becomes both an early warning system and a mirror of how well working capital is managed.

Making the improvements stick

Many working capital efforts free cash for a few months, then slowly slide back. The stock creeps up again, the old payment terms return and invoices start going out late. A few habits prevent this.

• Measure each part of the cycle monthly. Days of inventory, days sales outstanding and days payables outstanding, with a short comment on what moved and why.
• Fix the processes, not just the balances. A one-off collection drive helps once. Faster, more accurate invoicing helps every month.
• Make exceptions visible. Non-standard terms, overdue invoices above a set amount and items without movement should appear on a regular list that someone reviews.
• Keep the forecast weekly. It keeps cash on the agenda and shows quickly when things start to slip.
• Talk about cash in normal meetings. When working capital is discussed alongside sales and margins, it becomes part of how the business is run, not a special project.

Where to start

You do not need a large programme to make a difference. A good first month looks like this:

1. Calculate your cycle. Work out days of inventory, days sales outstanding and days payables outstanding from your own numbers, and what one day of each is worth in cash.
2. Pick the biggest lever. Usually one part of the cycle stands out. Start there.
3. Find the quick wins. Late invoicing, old disputes, obvious slow movers and invoices paid early are often easy to address.
4. Build the 13-week forecast. Even a rough first version is useful, and it improves every week.
5. Agree owners and a monthly review. Name who owns each lever, and look at the numbers together once a month.

Cash freed from working capital is cash the business has already earned. Getting it back is mostly a matter of attention and routine, and it gives the company room to grow, invest and handle surprises on its own terms.