A profitable growing business may need more cash because goods stay longer and customers pay after suppliers. Working capital shows funds tied to daily operations instead of treating inventory and balances as unrelated.
Where does money wait in the business?
Net working capital is broadly current assets minus current liabilities, while the cash conversion cycle combines inventory days and receivable days less payable days. Interpretation depends on sector, seasonality and supply terms.
Improving one balance can harm another
A business holds inventory for an average of forty-five days, collects receivables after thirty and pays suppliers after thirty-five. Its approximate cash-conversion cycle is 45 + 30 − 35 = 40 days. This is a simplified time measure of the funding gap, not a loan amount or a substitute for a detailed cash forecast.
Management might reduce inventory by ten days through smaller orders. That releases cash but could increase freight, lose purchase discounts or cause stockouts. Compare the liquidity benefit with service and cost consequences. If supplier payment is extended, consider changes in price or supply priority; unilateral late payment is not free financing.
Higher working capital alone does not demonstrate stronger liquidity. Obsolete stock and disputed receivables may increase current assets without producing usable cash. Separate the size of a balance from its quality, examining collectability and the economic usefulness or saleability of inventory.
The best improvement depends on the actual bottleneck. When demand exists but stock is unavailable, investing in inventory may help. When unwanted products accumulate, stopping replenishment may be the priority. Working-capital management connects departments around one operating cycle instead of asking each to optimise its own figure at everyone else's expense.
Reading the operating cycle
- Fix metric definitions and sources.
- Analyse inventory, receivables and payables by segment.
- Identify the largest cash driver and action owner.
- Test the decision effect on service, suppliers and margin.
Reducing SAR 40,000 of slow stock and collecting SAR 25,000 sooner could release SAR 65,000, but cutting a fast item too far may lose sales. Segments and actions matter more than a total alone.
One meeting instead of three separate reports
Bring purchasing, collection and warehouse owners together around the five largest amounts tied up. Attach a near-term action to each: stop a duplicated order, allocate a receipt or transfer stock to a branch needing it. Estimated cash release helps prioritise, but remains an estimate until collection or sale actually occurs.
Track the service consequences too. Reducing essential inventory may release cash while increasing cancelled orders; that cost must remain visible. A smaller, sustainable improvement without damaging supply or customer service can be preferable to a dramatic balance reduction that cannot last a month.
Sources & further reading
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General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
