Treasury Management

Working capital optimisation strategies

April 10, 2024

In business and finance, effective liquidity management is one of the determining factors for the success and long-term sustainability of any company. And among the different financial measures that companies must take into account is working capital.

In this article, we will delve into the importance of working capital and the various strategies that can be implemented to optimise it. In addition, we will explore how modern technological solutions can facilitate and improve this management to ensure maximum efficiency.

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What is working capital

Working capital is a financial indicator that is defined as the difference between a company's current assets and its current liabilities. In simple terms, it is the money a business has and needs to ensure its day-to-day operations, and includes payments to suppliers, employee salaries, rent, among others.

It provides a snapshot of the short-term financial health of a business, as it is a simple indicator to obtain, but at the same time a very useful one. Its main function is to ensure that a company has sufficient cash to meet its short-term obligations and operate effectively.

The importance of working capital

The importance of working capital lies in its close relationship with the liquidity of a company. An adequate level of working capital allows a company to meet its short term financial obligations, such as salaries, rent, suppliers, among others, without compromising its operations. Additionally, an efficient working capital management can lead to better profitability and a greater capacity to invest in growth opportunities.

Finally, it is an indicator that shows the use of liquidity. In general, if a company has insufficient working capital, it may have difficulties to grow or even maintain its daily operations, which may ultimately lead to a situation of default. On the other hand, an excess of working capital can indicate that the company is not using its resources efficiently, and it could be assuming a high opportunity cost.

How is working capital calculated?

The formula for calculating working capital is relatively simple. We only need to obtain the accounting and equity situation of a company and do the following:

Working capital = Current Assets - Current Liabilities


  • Current Assets: are the resources that a company expects to convert into cash in the short term (usually within one year). Current assets can include elements like cash, accounts receivable, inventory and other short term liquid assets.
  • Current liabilities: are the obligations that a company should pay in the short term (usually within one year). Current liabilities can include accounts payable, short term debts, accrued  expenses and other short term liabilities.

Interpretation of the working capital formula

If the result of the calculation is positive, it means that the company has sufficient current assets to finance its current liabilities. In general, this is the most desirable situation. However, this measure should be closely monitored, because if it is high enough, it could indicate that the company has too many assets tied up in inventory or accounts receivable, which could limit the efficiency and profitability of the company.

On the other hand, an insufficient or negative working capital may jeopardise the company’s capacity to meet its short term obligations, which may cause tensions with suppliers and creditors. Ultimately, this situation could lead to insolvency if not handled properly.

How to optimise working capital? Strategies

There are different strategies to optimise working capital management. Some of the most common are:

Efficient inventory management

Proper working capital management is not just a matter of reviewing the company's finances. Often, it is also necessary to have proper management of other processes, such as inventory at the logistics level. 

Well-managed inventory can free up a significant portion of working capital. This process starts with understanding customer demand and then synchronising it with production and purchasing. 

A Just-In-Time (JIT) inventory system can be particularly effective in this regard, as it minimises warehousing costs and avoids the accumulation of unnecessary stock. Additionally, the implementation of a centralised inventory system can provide real-time visibility of stock levels, allowing for timely adjustments.

Accounts receivable management

Accounts receivable is a fundamental component of any company's finances. It is the money owed to the company by customers and other agents for goods or services they have received but not yet paid for, as they have been financed on credit.

It should not be forgotten that time is money in any business, and the longer it takes to collect payments from customers, the more cash flow is reduced. Therefore, in order to speed up the collection of receivables, companies can implement strict credit policies, offer early payment discounts and use invoice tracking tools. In addition, regular analysis of the ageing of receivables can help identify problems before they become uncollectible losses.

The ultimate goal should be to collect for products sold or services rendered as diligently as possible.

Accounts payable management

Accounts payable is the opposite of accounts receivable. These are financial obligations or debts that a company has with its suppliers for goods or services received, but which it has not yet paid. This account also includes debts with financial institutions or tax deferrals with the tax authorities and other public bodies, among many other items.

Accounts payable for deferred payments to suppliers represent a source of free financing that can be optimised to improve working capital. This does not mean delaying payments as long as possible, but rather negotiating payment terms that align with the company's cash flow cycles. Careful analysis of supplier terms and the implementation of efficient accounts payable processes can help achieve this balance.

In general, the longer the supplier payment period, the more optimised working capital can be.

Debt consolidation and restructuring

Debt consolidation can help businesses free up working capital by bundling several loans into one loan with a more favourable term and interest rate. However, this approach should be handled with care, as debt consolidation can sometimes lead to a higher total cost of borrowing if the new loan has a longer term.

The same is true for possible debt refinancing and restructuring. Converting a short-term debt into a long-term debt can alleviate the company's balance sheet. This is one of the main options proposed in an insolvency proceeding, when the viability of the company is in question, precisely because of liquidity problems.

Working capital financing

There are a number of financing tools specifically designed to support working capital management, most of which are offered by financial institutions. 

These include lines of credit, factoring and inventory financing through promissory notes or discounted bills of exchange. These tools offer companies the flexibility to access funds as needed, rather than relying solely on their own cash operations.

Outsourcing of non-core functions

By outsourcing non-core functions, companies can concentrate on their core activities and reduce the amount of capital needed to manage operations that are not directly related to revenue generation.

This frees up liquidity that can be put to other uses, either to pay down debt or to improve business capital.

Use of technology

The use of technology, such as inventory management software, enterprise resource planning (ERP) systems, and especially treasury management solutions such as Embat, can help companies manage their working capital more efficiently. 

These platforms can provide real-time visibility into the status of accounts receivable and accounts payable, inventory levels, cash flow forecasting and other similar metrics, enabling companies to make informed and timely decisions.


Effective working capital management is critical to ensuring the survival and growth of any business. By implementing working capital optimisation strategies and leveraging technology, companies can improve their liquidity, profitability and competitiveness. 

At the end of the day, healthy and well-managed working capital can be the engine that drives the long-term growth and success of your business and help improve your financial processes.

Co-founder @ Embat
Toni worked for over a decade at J.P. Morgan in Spain and the UK as the Executive Director of Investment Banking and Commercial Banking for family businesses before co-founding Embat.

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