How Working Capital Optimization Strengthens Liquidity and Provides a Competitive Advantage

By Maria Rassoulis, Senior Vice President, Market Executive, Citizens

Working capital optimization helps businesses improve liquidity by moving cash more efficiently through receivables, inventory and payables. Strong working capital management, combined with the right financing and treasury management solutions, gives businesses greater financial flexibility to invest in growth and respond quickly when opportunities arise.

Introduction

Having a clear view of cash flow and access to the right financial resources helps businesses prepare for growth opportunities and unexpected challenges. A recent Citizens survey found that 55% of businesses with $5M+ in annual revenue use digital cash management tools to improve visibility into cash flow, while 38% work with a banker or financial adviser on liquidity planning.¹ Effective working capital management helps keep cash moving through the business and available when it's needed most. That financial flexibility can help businesses act on opportunities and gain a competitive advantage.

Working capital optimization: How it improves liquidity

Net working capital is the difference between a business’s current assets and current liabilities and reflects the resources available to support day-to-day operations. Optimizing working capital means managing receivables, payables and inventory so cash moves through the business as efficiently as possible.

As small and midsize businesses grow and operations become more complex, small inefficiencies in collections, payments or inventory can add up quickly. This leaves less cash available for other business needs.

I look at visibility as the foundation of effective working capital management. Knowing where cash is, how quickly it is moving and where more of it can be freed up helps businesses improve liquidity and gives them more flexibility in how they use their capital.

That flexibility can become a competitive advantage. Strong liquidity gives a business more options when making decisions about growth, from investing in new equipment or pursuing an acquisition to negotiating favorable supplier terms or responding to changing market conditions. This becomes especially valuable when competitors face the same conditions but have less cash or access to capital.

The cash conversion cycle: Measuring working capital efficiency

The cash conversion cycle (CCC) is one of the clearest measures of how efficiently a business manages working capital. It tracks the number of days between when a business pays for goods or services and when it collects cash from customers.

The formula is:

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

• Days sales outstanding (DSO): How long it takes, on average, to collect accounts receivable after a sale
• Days inventory outstanding (DIO): How long inventory sits before it is sold
• Days payable outstanding (DPO): How long you take to pay suppliers

4 working capital levers that free up cash

When I evaluate a business's working capital, I look first at four areas: receivables, payables, inventory and financing. Most businesses do not need to address all four at once. Start with the area where changes are likely to have the greatest effect on liquidity.

Accelerate accounts receivable

Prompt invoicing, consistent follow-up and automated payment reminders help speed collections. Among businesses with $5M+ in annual revenue, 32% are accelerating or plan to accelerate receivables in the next three months to strengthen liquidity.¹

Consider payment terms based on customer history and risk without putting important relationships at risk.

Manage accounts payable strategically

Review supplier terms to determine where payment schedules may be adjusted to keep cash in the business longer. Weigh longer payment terms against available early payment discounts and communicate openly with important suppliers.

Right-size inventory

Excess inventory ties up working capital and adds storage costs, while too little may lead to lost sales. Review sales patterns and inventory turnover to identify slow-moving stock and improve purchasing decisions.

Align financing with liquidity needs

Financing should complement strong working capital management, not compensate for weak internal processes. Lines of credit, asset-based lending and trade finance may address different liquidity needs. Evaluate financing options before cash becomes tight and avoid relying too heavily on a single source of capital.

Putting working capital optimization into practice

Knowing where to focus is an important first step. I recommend starting with a clear picture of how cash moves through the business, then identifying the areas with the greatest potential to improve liquidity.

Step 1: Establish your baseline

Calculate your days sales outstanding, days inventory outstanding and days payable outstanding to establish your current cash conversion cycle. Look for the areas where cash remains tied up the longest.

Step 2: Build a 13-week cash flow forecast

A rolling 13-week forecast provides a near-term view of expected cash inflows and outflows. Update it weekly to reflect changes in collections, payments and other financial activity.

Step 3: Review receivables and payables for inefficiencies

Look for manual processes that are slowing down invoicing, collections or payment approvals. Identify where automation can reduce delays and improve visibility into cash movement.

Step 4: Refine and monitor your strategy

Review customer and supplier terms, evaluate financing options, track key liquidity metrics and assess treasury management tools that can improve visibility and automate cash management. Consider adjustments to terms that could improve cash flow while preserving important business relationships. Regular monitoring helps ensure your working capital strategy continues to support growth.

Potential issues and strategies to address them

Working capital decisions often affect more than liquidity. I’ve seen changes intended to improve cash flow have unintended effects on customers, suppliers, employees and access to financing. I recommend considering these potential issues before making significant changes.

Cash flow volatility. Seasonal demand or reliance on a small number of customers may make cash flow less predictable. Model different scenarios to understand the potential impact and prepare for a range of outcomes.

Supplier relationships. Extending payment terms too aggressively may strain important supplier relationships. Discuss changes openly and consider a phased approach, particularly with suppliers that are critical to operations.

Reliance on one type of financing. Relying too heavily on a single credit facility may limit flexibility as business needs change. Review available financing options periodically to make sure they continue to align with the business’s liquidity needs.

At a glance: Working capital levers

Conclusion

Working capital optimization gives a business greater control over how cash moves through day-to-day operations. Better visibility and effective management of receivables, payables, inventory and financing help keep cash available when it is needed.

I recommend treating liquidity as an ongoing part of financial planning rather than something to address only when cash becomes tight. Regularly reviewing working capital and financing needs helps a business maintain the flexibility to act on its plans.

Investing & Benefits for Businesses | Citizens

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Frequently asked questions

Q. How do I know if I have a working capital problem?

A profitable business can still have a working capital problem if it struggles to cover payroll, purchase inventory or take on new business because cash is tied up in receivables or inventory. If you regularly find yourself delaying purchases or worrying about cash despite strong sales, it is worth taking a closer look at your working capital.

Q. How often should I review working capital metrics?

I recommend reviewing your cash conversion cycle and other key liquidity measures at least monthly. Businesses experiencing rapid growth, seasonal demand or cash flow pressures may benefit from reviewing them weekly, along with a rolling 13-week cash forecast.

Q. When should I talk to my banking partner about working capital?

Do not wait until cash becomes tight. Your banking partner can help evaluate financing options, treasury management tools and cash flow strategies before liquidity becomes a constraint on growth. Planning ahead typically provides more flexibility than reacting after a problem develops.