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There's a version of a business that runs with less borrowed cash, collects faster, pays smarter, and holds exactly as much inventory as it needs. Most finance teams know it exists, but not all have a clear plan to get there. Here's how to optimise working capital effectively.
What does it mean to optimise working capital?
Working capital optimisation isn't a transformation project. It's a set of decisions about when to collect receivables, when to pay, and how much stock to hold. Done correctly, effective working capital management compounds quietly over time. Get it right and you’ll unlock liquidity without touching credit lines. Get it wrong and the funding gap keeps widening. In fact, a recent PwC Working Capital Study found that globally, there is over €1.5 trillion in excess working capital tied up inefficiently.
The cash conversion cycle: The metric that holds it all together
Working capital is the difference between current assets and current liabilities. But the number that tells the story about how efficiently a business is using that capital is the cash conversion cycle:
Formula:
Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Days payables outstanding
or in short:
CCC = DIO + DSO - DPO
| Metric | What it measures |
| DIO (Days Inventory Outstanding) | How long stock sits before it's sold |
| DSO (Days Sales Outstanding) | How long it takes to collect payment after a sale |
| DPO (Days Payable Outstanding) | How long it takes to pay suppliers |
Every day a firm shortens the cycle and reduces its reliance on external financing. Most companies track these three numbers but what is even more important is where to focus and when.
How to optimise accounts receivable (reduce DSO)
Reducing DSO is often the quickest win available. It doesn't require renegotiating supplier contracts or rethinking the supply chain. It starts with removing the friction and the excuses that slow payments down. Here are a few practical steps to achieve this:
1. Set the terms before work begins: Run credit checks at onboarding of clients, establish limits, and make payment terms part of your customer master data from day one. Upstream discipline prevents downstream collection problems.
2. Send accurate invoices immediately: An incorrect invoice gives customers a reason to delay payment. Issue invoices the moment products are delivered or services completed, verify them before sending, and track the proof points like delivery confirmations, PO references and signatures.
3. Automate the follow-up: Don't wait for invoices to go overdue before chasing. Send reminders before the due date, then escalate systematically. Manual collections become increasingly difficult to scale with increasing transaction volume; here is where automated workflows help.
4. Treat customers differently. Some clients pay late out of habit. Others are genuinely struggling. Segment by payment behaviour and tailor your approach accordingly. A single collections process applied to every customer leaves cash on the table.
AI-enabled treasury platforms can help predict individual customer payment behaviour, flag at-risk accounts early, and automate follow-up so collections teams spend their time where it actually moves the needle.
How to optimise accounts payable (extend DPO)
DPO optimisation is about paying at the right time, not as late as possible. Stretched payment terms that damage supplier relationships create operational risk that quickly outweighs any short-term cash benefit. Here are a few tips how to do it fairly and right:
1. Verify before you pay: Check every invoice against agreed terms such as price, quantity, and conditions before processing. Reject incorrect invoices proactively rather than chasing credits after the fact.
2. Do the maths on early payment discounts. A 0.5% discount for paying 30 days earlier has very different value depending on your cost of capital. As McKinsey notes,"a 0.5 percent discount in exchange for paying 30 days earlier is a different discussion in a 5.0 percent cost-of-capital environment than a 10.0 percent cost-of-capital environment." Run the calculation every time rather than accepting or declining by default.
3. Batch payments deliberately: Weekly or fortnightly payment runs replace daily processing and reduce premature settlement. Pay what's due since the last cycle: no more, no earlier.
4. Segment your suppliers: Apply the same logic as for receivables. Strategically important suppliers warrant different treatment than smaller, lower-risk ones. Renegotiate terms where you have leverage; preserve relationships where continuity matters more.
How to minimise working capital through inventory management
Inventory is working capital in physical form. The goal isn't to minimise it regardless of consequences. Stockouts are expensive too. It's to hold the right amount at the right time.
Just-In-Time (JIT) inventory approaches work well for predictable, stable demand. Safety stock buffers make sense where lead times are long or demand is volatile. The key is segmenting your product range by demand pattern and setting reorder parameters like service levels, minimum quantities, safety thresholds based on actual behaviour rather than inherited defaults.
AI-driven demand forecasting is changing what's achievable here. Algorithms that incorporate seasonal variation, market signals, and historical patterns can deliver meaningfully better accuracy than manual forecasting, with a direct and measurable impact on DIO.
What are the KPIs to track working capital performance?
DSO, DPO, and DIO are useful headline numbers. But they're too broad to tell you where to act.
Four more granular metrics that high-performing finance typically teams track:
| Metric | What it measures |
| Weighted Average Terms | The payment terms actually agreed across your customer or supplier base |
| Weighted Average Days to Collect | Actual collection performance against those terms |
| Weighted Average Days to Pay | Actual payment performance against agreed terms |
| Percent Current | The proportion of receivables or payables sitting within agreed terms |
These metrics allow you to drill into specific customers, suppliers, geographies, or business units. They reveal whether a working capital problem is structural (a terms issue) or operational (an execution issue). Aggregate numbers obscure exactly the granularity that drives change.
Automation: The modern working capital lever
Manual working capital management becomes increasingly difficult to scale. As transaction volumes grow, adding headcount to manage collections, payables, and cash positions isn't sustainable.
Modern treasury platforms automate bank feeds, consolidate balances across entities and currencies in real time, and replace spreadsheet assembly with live dashboards. AI flags anomalies, predicts shortfalls, and surfaces the specific actions that move working capital metrics. To achieve proper oversight, finance teams rely on real-time cash flow forecasting and working capital visibility.
According to McKinsey research, companies systematically focusing on streamlining sales and purchasing processes, collections optimisation, and AI-enabled analytics can improve their accounts payable and receivable balances by 30% or more.
Better data leads to faster decisions. Faster decisions lead to faster cash. The compounding effect is significant.
The part technology can't fix on its own
Working capital sits across functions. Sales owns customer relationships and invoicing terms. Procurement owns supplier agreements and supply chain owns inventory levels. Finance holds the overall picture. If these teams aren't aligned or are incentivised in ways that work against each other, no platform fixes it.
The most effective organisations usually treat working capital as a cross-functional responsibility, typically with CFO oversight and representation from finance, supply chain, procurement, and controlling. Accountability without ownership is just reporting.
The simplest place to start
Calculate your cash conversion cycle by entity and business unit. Identify which component among receivables, payables, or inventory represents the biggest opportunity. Pick one lever, measure it at the transaction level, and move it.
The finance teams making the most progress aren't necessarily the most sophisticated. They're the ones who've stopped treating slow payment, early settlement, and excess stock as unavoidable costs of doing business, and started treating them as the problems they are.
