How to reduce your working capital and free up cash

Many owners hunt for cash in the wrong places. They negotiate their overdraft, postpone an investment, sometimes delay their own pay. Meanwhile a large sum sits idle on the balance sheet as working capital. With our clients the typical picture looks like this: several weeks of operating costs locked up in receivables and stock, and nobody watching it because the P&L happens to look fine. Working capital is the money your business permanently ties up just to operate: what your customers owe you, plus what is sitting in inventory, minus what you owe your suppliers. Reducing it costs nothing. No dilution, no bank, no loan file to assemble. It is the cheapest source of cash there is, and by far the most overlooked.

What working capital really is

The basic formula fits on one line: working capital = receivables + inventory – payables. If you sell on credit and carry stock, you advance money before you get paid; your suppliers advance part of it back by granting you terms. The difference is what you fund out of your own pocket, every day, without seeing it. The faster you grow, the larger this need becomes in absolute terms: that is exactly why a profitable, fast growing business can run short of cash, because every extra euro of revenue consumes a fraction of it up front.

Working capital is the only line on the balance sheet that funds itself: every day shaved off the cycle hands you cash you never have to repay.

Measure it in days, not in euros

A figure in euros does not tell you whether your working capital is good or bad. Convert it into days, which is the only way to track yourself over time and against your sector. Three indicators are enough.

• DSO, days sales outstanding: receivables ÷ revenue including tax × 365. The number of days your customers actually take to pay.
• DIO, days inventory outstanding: inventory ÷ cost of goods sold × 365. The average time a product stays tied up before it is sold.
• DPO, days payable outstanding: payables ÷ purchases including tax × 365. The number of days you take to pay your suppliers.

The cash conversion cycle then comes down to: DSO + DIO – DPO. That is the number of days your money stays locked up between paying your suppliers and being paid by your customers. The lower it is, the healthier you are; a negative figure (as in some businesses paid in advance) means your customers fund your growth for you.

Lever 1: collect faster (DSO)

This is almost always the quickest lever, because it depends only on you. Most SMEs and startups lose ten to twenty days of cash not because customers are bad payers, but because the internal process is loose. I have seen invoices go out three weeks after delivery, simply because accounting runs them at month end. Vague terms, slow or missing chasers: customers pay at whatever pace you let them set.

• Invoice on the day of delivery, not at month end. Every day late on the invoice is a day late on the cash.
• Ask for a deposit with the order on larger projects: 30% on signature transforms your cash profile.
• Run a systematic, dated chasing routine: a courteous reminder three days before the due date, a chase the day after, a call eight days later. Consistency matters more than firmness.
• Make payment easy: saved bank details, a payment link, direct debit for recurring customers. People pay faster when paying is simple.
• Resolve disputes within 48 hours. A contested invoice left unresolved is one that will never be paid on time.

Lever 2: lighten inventory (DIO)

If you carry stock, that is often where the most cash sits idle, and where it goes most unnoticed. No need to shave every shelf: what matters is the stock that does not move. Rank your items by turnover. A minority drives most of the sales; a long tail ties up cash and returns nothing. I have seen owners discover, while preparing a sale of the business, that a third of their inventory had not moved in over a year. Clear the dead stock, even at an accounting loss: a discounted product turned back into cash beats a product valued on the balance sheet that will never sell. Tighten reordering on the items that turn, and negotiate more frequent deliveries in smaller quantities rather than large batches paid up front.

Lever 3: pay at the right rhythm (DPO)

Stretching supplier terms frees cash, but it is the lever to handle with the most care. Paying late without agreement damages the relationship and, in France, exposes you to penalties set by the law on payment terms. The right approach is negotiated: ask to move from 30 to 45 or 60 days in exchange for volume or a commitment, align your supplier due dates with your customer receipts, and judge early payment discounts case by case. A 2% discount for paying thirty days earlier carries a very high annualized cost: take it only when your cash is comfortable.

Reducing working capital is not tightening every screw: it is collecting faster, carrying only the stock that moves, and paying at a negotiated rhythm rather than one imposed on you.

A worked example

Take a company with 6,000,000 € of revenue. Its DSO is 70 days, its DIO 50 days, its DPO 40 days. The cash conversion cycle is therefore 70 + 50 – 40 = 80 days. As a first approximation, one day of cycle is worth roughly revenue ÷ 365, so close to 16,400 €. In other words, every day shaved off the cycle permanently frees about 16,000 € of cash.

• Bring DSO from 70 to 55 days (chasers and invoicing on delivery): 15 days × 16,400 €, around 245,000 € of cash freed, once and for all.
• Bring DIO from 50 to 40 days (clearing dead items): 10 days, around 164,000 € more.
• Stretch DPO from 40 to 50 days through negotiation: 10 days, a further 164,000 €.

In total the cycle drops from 80 to 45 days and the business frees on the order of 570,000 € of cash without borrowing a euro or raising capital. No bank will lend you that sum as fast, or as cheaply. And this cash, unlike a loan, is never repaid: it stays yours as long as you keep the cycle tight.

Growth and working capital: the trap to anticipate

Beware the perverse effect of growth. If your cycle stays at 80 days and your revenue doubles, your working capital doubles in value too: you have to fund that gap before you have even collected. That is the exact mechanism that drains healthy, fast growing companies. To understand it in depth, our guide on why profitable SMEs and startups still run out of cash sets out the link between profit, growth and cash; reducing working capital is the most direct counter to it.

Where to start this week

You do not need a six month project. Calculate your three indicators over the last twelve months, compare them to last year, and find the one that has slipped the most. Nine times out of ten it is DSO, and the first action is free: take invoicing and chasing back in hand on Monday.

What a fractional CFO mostly adds here is constancy: a rigorous measure of your real cycle, the sizing of what each lever would free in your specific case, and the processes that make the gain hold once attention moves elsewhere. That is where most of these gains evaporate: three months of effort, then DSO quietly creeping back up. If you want to know how much cash is sitting idle in your working capital today and which of the three levers to pull first, a one hour diagnostic conversation is enough to put the numbers on the table and set the first target in days.

Idle inventory: release cash without creating shortages

Combine stock age, recent sales, confirmed orders and purchases already committed. Book value is not a promised resale price. Test lower purchases, discounts or retiring a line, including selling costs and shortage risk. An accounting write down alone does not add cash to the bank.

Monthly reviews should separate sold, collected, written down and remaining inventory. Review inventory and receivables together: a credit sale may merely move the cash tied up.

See how to prepare this decision.

Frequently asked questions

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