Articles
November 20, 2025
Pulling the Right Levers: Insights on Optimizing Working Capital
# Cash and Working Capital
# Technology
A cash flow culture helps companies go beyond tactical moves and treat working capital as critical to strategic capital allocation.
Improving working capital management is a key step for companies intent on enhancing free cash flow and prioritizing shareholder returns. That premise underpinned a session on pulling levers to fortify working capital performance led by a Big Four accounting and consulting firm at the fall meeting of NeuGroup for Working Capital Optimization sponsored by Falcon Group and BBVA. The firm’s presentation showed that some working capital wins can be achieved in three months or less, in part because many of the drivers for unlocking cash and reducing working capital “are controllable by the company,” as one slide put it.
- “We all know our C-suite cares way more about free cash flow than ever before,” said one of the presenters. “When you think about the working capital dynamic, it’s one piece of that overall puzzle that affects cash flow. And it’s not just operating cash flow in the short term, but on a long-term, sustainable basis.”
- Effective optimization, he said, requires companies to take a hard look at how much working capital they need and whether or not it’s a good use of capital. “So it does tie back to the concept of capital allocation,” he added. “Unfortunately, most corporates don’t think of it that way. They think of it way more tactically.”
- The firm recommends that in addition to addressing traditional working capital metrics like days payable outstanding (DPO) or days sales outstanding (DSO), corporates strive to think strategically how working capital fits into their broader capital allocation picture. Executing on the vision often requires an organizational shift in culture where everyone adopts a cash flow mindset.
How much capital? The first optimization challenge: There’s no magic formula for determining the ideal amount of working capital—and it’s a moving target. It varies by company and industry and reflects variables like company policies (how much inventory to keep on hand), R&D cycles, product mix, supply chain complexity and seasonality. “The first thing is how do you measure it?” one member asked. “Is the cash conversion cycle the right metric or should you be looking at a percentage of sales?”
- “Our perspective is you triangulate around what the right metrics are,” the presenter responded. “One individual metric will never give you that right story. And you need decision frameworks in place to find out what is the right balance and what trumps what when decisions need to happen.”
- For example, the prospect of tariffs may lead one company to raise working capital to build inventory, enabling it to achieve sales growth. Another, facing constrained budgets, may not be willing to “give up that dollar for sales growth,” he explained.
Pull the levers. The good news is that there are clear levers within the cash conversion cycle that companies can pull to achieve working capital goals. The presentation focused on payables and receivables, stressing the need to set targets and track execution—ideally linking the achievement of goals to performance evaluations, maybe even compensation.
Members heard about a third category, inventory management and finance, in a session led by Falcon Group that will be featured in an upcoming article. Whatever the category, hitting the targets and ensuring any gains are sustainable, the presenters said, requires buy-in by senior leadership to create a culture where cash is prioritized by everyone across the enterprise. That leads to close management of:
- Procure-to-pay. This boils down to the payment terms companies agree to with suppliers as measured by DPO. Longer terms mean more cash on hand. The firm typically sees improvement opportunities of 20% to 80% for payables, making this in some ways the lowest-hanging fruit.
- “Think about your discipline around payments,” advised another presenter from the firm. “Are you thinking about where you can extend terms specifically based on what you are buying? Have you thought about the standard terms in your industry? Should it be 60 days, should it be 90? Sometimes it’s never been looked at. It’s ‘just the way we’ve always done things.’ And it has massive implications.”
- The discipline may rankle procurement teams that are offered discounts in exchange for shorter payment terms from vendors. That’s where strong leadership can make a difference. The first presenter said one client allowed exceptions for payment terms—but measured the effect on working capital. “The CFO has quarterly meetings with the divisional presidents to say, ‘for the payment terms exceptions that you have granted, guess what? That costs us $200 million. I’m going to either charge you for that $200 million or I’m going to take it away from you. Let’s talk about it.’”
- “You will be very surprised how difficult it is,” his colleague added. “They’ll say, you know what, I paid the supplier in two days for our entire relationship. They are important to me and we will never change that. And they will say this is the case across all of these suppliers under my shop, which is not true. But again, that’s what you’re going to hear.”
- Order-to-cash. This lever is pulled partly by better bill collecting as tracked by DSO. The faster the money arrives after a sale, the more cash on hand. The firm puts typical improvement for receivables at 20% to 40%. Those gains are often possible by adopting tactics like sending emails to ensure timely payment. “Simply going in there and saying I’m going to implement an automated email at 15 days, 30 days, 45 days and 60 days—massive improvement,” the second presenter said.
- The key, he stressed, is examining what shortcomings in the working capital process are impeding cash flow gains. “When we do our optimization work, we spent a lot of time thinking about what actually is impacting you and to what extent.”
- Other DSO problems include billing errors that delay payment and failing to send out bills for weeks because, for example, someone went on vacation. “None of these are rocket science, but each of them causes bleed from a DSO standpoint—and some of them massively,” he added.
Priorities and enablers. Here are additional insights and advice from the firm’s presentation, including the use of so-called enablers to improve working capital sustainably by using the right metrics, reporting, technology, organization and culture.
- Prioritize actions to unlock cash and build capabilities. Don’t try to boil the ocean. Quick wins release cash fast. Mid-term levers embed discipline, process, accountability and create standardization. Long-term initiatives deliver structural efficiency. Properly addressing and prioritizing each lever delivers fast results and sustainable cash performance, according to the firm.
- Sustainability is key. Don’t go for band-aid fixes like paying a group of suppliers late one quarter. Initiatives are short-lived; long-lasting results require cultural change mandated from the top. Embed cash discipline into daily decisions and routine. Establish a cross-functional cash governance council.
- Technology is the multiplier of working capital excellence. Integrate ERP, TMS and analytics for real-time insight. Apply AI and analytics to predict risk and optimize returns.
- Metrics matter. Define standardized working capital metrics with clear ownership. Embed KPIs into business routines to drive accountability and action.
A word to the wise. The first presenter said companies intent on working capital optimization efforts have to communicate progress and know when to move beyond special programs or efforts. “Showing wins and keeping that momentum—you have to be smart because people get fatigued,” he said. “And when does working capital stop becoming an initiative and part of how you run the business? Labels and initiatives are great, but within two years, if you’re still calling it an initiative you’re dead in the water.”
- Fortunately, he noted, there’s no single sequence of steps companies must take to optimize working capital as long as they plot a sensible course. “You can go after this 10 different ways,” he said. “You can start in the very beginning, you can start in the middle. Companies start it in different places and that’s completely fine. Just figure out what the rest of that road map looks like.”