Lock and Load: Working Capital Warfare V

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I didn't learn how to manage working capital in finance.

Early in my career I got a lucky break. I was maybe 28 and got invited to join a post-merger integration (PMI) team after a big corporate deal. I would come out of my day job and join the PMI team, where I had two roles: running the finance function integration workstreams and operational ownership of a $100m working capital synergy target.

I had no business getting those opportunities that early. I was talented and hardworking, but it was a hell of a risk for them. I soon realized it had been handed to me for two reasons:

The functional integration half of the role was so the CFO could get a good look at me.

But the working capital delivery was for the CEO. It was something he was particularly passionate about; he wanted to drive it himself, with me as the responsible leader on the ground.

It was an extraordinary gift.

Once a quarter, I would have to present progress at the full board meeting. I got to experience all the imposter syndrome, anxiety, and pressure of that setting while having total air cover from the CEO, who had 100% pre-handled the board before I walked in.

I didn’t know this was how board meetings worked at the time, but I do now. I’ve done it many times for others myself since.

I also had a monthly slot in the weekly exec meeting to communicate progress and coordinate work across the business. I got in the room for some of the highest-profile customer and supplier discussions and manufacturing reviews, all under the direct mandate of the CEO.

But my real job was to take what was agreed in those sessions and make sure it actually got ‘operationalized’. Fancy corporate speak for: making sure shit got done.

Intention rarely converts to execution on its own steam when it requires extra effort… especially with working capital. Not because people are lazy. Because they are busy with a hundred other things to worry about.

Every line item in my initiative tracker would die a thousand deaths before it converted to cash. Payment term changes that didn't get reflected in customer systems. Production changes that didn't land in cash because the supply chain quietly increased stock holdings to compensate. I learned every part of the order-to-cash, procure-to-pay, and manufacturing cycles.

It was like squeezing cash through the business like toothpaste through a tube.

And I learned the most important lesson about working capital I have ever received. By the time it hits the spreadsheets, it's far too late. The things that really drive cash have already happened.

Good working capital management is happening everywhere, all the time, in the decisions made by sales, procurement, supply chain, and operations. The finance team's job is to design the system, hold everyone to it, and measure what comes out the other end.

The target for my project was $100 million of attributable working capital improvement inside 12 months. It took 14 months. I felt like I'd failed; I was genuinely mortified and thought the rocket ship I’d been handed was out of gas.

The CEO put his arm around me and reassured me that the extra two months were an investment in me and my learning. And that next time, I’d be able to hit my target within the 12 months.

I later found out the real target had been $70m in 18 months.

Another lesson learned, I suppose. How to motivate a young man in a hurry…

So, this week we’re getting tactical. What does good execution actually look like?

You are not a novice, so I am not going to cover the basics: credit checking customers, extending supplier payment terms, and reducing inventory. If those are not already obvious, there is an AI-generated cheatsheet waiting for you somewhere on LinkedIn….

What I want to focus on are the failure modes, trade-offs, and CFO-grade issues that sit behind those basics.

First, let’s take a look at some common failure modes worth knowing before we get tactical. 

Whenever folks land on a working capital KPI, the one that always comes up is the Cash Conversion Cycle (CCC), measuring how quickly you turn sales into cash, expressed in days.

I do not like this measure. Or at least, I do not like how it gets conventionally used. I’ll explain why.

CCC is typically defined as Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) less Days Payables Outstanding (DPO).

Conceptually, it makes sense, but the problem is in how it gets used. Let’s dig in:

First, the numerator doesn’t necessarily encompass the true full working capital definition (as we defined it in part one of this series). You might be measuring part of the picture and calling it the whole thing. DPO is particularly problematic because it only addresses part of the spend.

Second, the calculation as defined asks us to add fractions with different denominators… we learned in high school that you shouldn’t do that.

You are probably thinking, ‘So what?’ Two of my character traits (read: flaws) are that I like to think about everything from first principles, and at heart, I’m a bit of a math purist. (Yes, yes, please form an orderly line, ladies…)

But does it actually matter?

I think so.

Say you have a growing business with 70% gross margins. DSO of 30 days. DPO of 45 days. No inventory to keep life simple. Traditional CCC would tell you you have a CCC of negative 15 days. We talked earlier in the series about how glorious negative CCC is in a growing business.

But let’s look closer. An additional $1m of monthly sales will mean:

For your additional $1m of sales, you actually had to invest a net $550k of working capital. And what about if that growth means more payroll investment, which is outside your DPO definition… the number gets worse still.

You can see how lazy napkin math could have you YOLOing bare cash money (I have Gen Z kids) into a growing business with 70% gross margins and a ‘negative CCC’.

And then you’d hit a cashflow wall very quickly.

How do you fix it? As ever, the devil is in the details. More important than any balance sheet metric is a deep understanding of the drivers of your actual cash conversion cycle.

There is no shortcut to this. No top-down rubric. If you want finance to be genuinely influential on working capital, you (or your team) have to put the hazmat suit on and understand every step in the decision chain.

Because the decisions that drive your true CCC start before orders are even placed. For example, the length of your sales cycle and your production and delivery planning cycle are critical (and are unmeasured by top-down working capital measures):

At what point does your business commit to production, even partially? Are you manufacturing or delivering to order? And if so, are you holding inventory to accelerate delivery? In that case, the production planning process and assumptions based on your sales cycle become key drivers of your cycle.

The real question is always the same: where is time being lost in the whole cycle, and what is it being traded off against? Or is it just poor execution/efficiency?

The best way to figure this out is to break your whole cycle down into its atomic steps and understand how much time is spent at each one and how much of that time where things are happening (active time) vs time where work is sat in an intray (dwell time).

Here is an example of a sales and delivery cycle, from the point a sales order is confirmed:

This gives you a one-page view of every step in the cycle: who owns it, where time is lost, and current versus target state.

Behind a document like this, you can set individual performance targets all the way down to shop floor level, build operational accountability that connects directly to working capital outcomes, and map every day of dwell time back to what it costs the business in cash and speed.

In this example, it takes 84 days to get paid. With some process engineering and better execution, that could be 42 days.

We'll save process re-engineering for another series, but in a nutshell:

Used well, AI will be a massive unlock here. But for now, know your cycles at this level of detail. And if you are pissing time away, at least make sure you know exactly where, so you can attack it.

The hairiest problem with working capital is ownership. It tends to sit with finance by default. But finance doesn't control the levers. So who does?

Well… it crosses a lot of functional barriers. Cashflow is where many different business processes converge: order-to-cash, procure-to-pay, inventory, etc.

Some things are easy to allocate: finance owns reporting, operations owns fulfillment, sales owns volume, and procurement owns supply.

But none of those things pull working capital levers directly. The big drivers happen in the overlap between functions:

And what is your role in this as CFO? You are not "finance" in this model; your team is.

You are the architect of the whole framework. How well you design it and how effectively you break down the functional silos to enable better decisions will determine how well the business optimizes its working capital.

Start from first principles: who is responsible for what. Then build your management system around that, and create the right discussion forums to solve the more complex trade-offs: credit terms vs. pricing, availability vs. safety stocks, production run lengths vs. inventory holdings, etc.

This is such an important and underdeveloped skill in new CFOs that I dedicated a whole module to it in SimCFO, the CFO simulation experience I launched earlier this year. You get to practice exactly this: orchestrating a working capital transformation under extreme cashflow pressure, without the risk of getting fired if you screw up.

If you want to check it out, you can learn more here.

I could write a whole post on any single item in the diagram above, and we don’t have time for that. But I want to close this series with five tactical difference-makers that have consistently moved the needle for me in leading working capital:

It is very hard to change the terms structure in an established product, supply chain, or relationship. Moments of innovation are where the opportunity is greatest.

As I write this, I just received my monthly Brother Connect bill for home printing. They send new cartridges when I need them and smooth the cost into a monthly charge. Under the hood, all that has happened is that I am prepaying for cartridges Ten years ago I used to just buy cartridges as I needed them. That is a working capital decision baked into product design. Do the same.

Negotiating 60-day supplier terms is smart treasury management. Negotiating 45 days and paying on day 60 is not. It is fragile; you are one CFO change at your customer away from that arrangement disappearing overnight, and potentially something worse happening with it.

Being a slow player is ok, being a bad payer is not… it will cost you in ways you don’t know, and your working capital benefit will always be artificial.

Under most supply chains, one balance sheet takes a disproportionate share of the working capital load. In a past CFO role, our cashflow model was built on the back of our ultimate supplier, one of the strongest (and biggest) balance sheets you’ll ever see.

There was a cost of capital arbitrage there, and collectively as a supply chain we used it deliberately, and then priced it in accordingly.

In contrast, forcing that pain onto a weaker balance sheet is fragile, and it adds cost to the value chain. So bullying smaller suppliers into taking shitty payment terms is not as clever as you think. Someone has to pay for the higher cost of capital and supply chain fragility. Hint: it's you, eventually.

SKU complexity, product proliferation, and project sprawl account for a disproportionate share of working capital inefficiency. People love adding new things. Nobody loves cutting them. You need to be a relentless force in challenging and removing the tail.

It helps your P&L, but it helps your working capital even more.

So much working capital management focuses on trade receivables, payables, and inventory. But pull your current assets at the GL level, and I guarantee you will find a graveyard: deposits, prepaid expenses, and balance sheet items that nobody thinks about through a working capital lens. That is your cash. Go get it.

And that brings us to the close of this month’s Playbook: Working Capital Warfare.

No other discipline will test your ability to mobilize the business across functions and the C-suite more than working capital management. Given the opportunity to prioritize something else, the business will always take it and leave working capital as a finance problem.

As CFO, you need to architect both the correct design and relentless execution to win the working capital war.

Next up we start a new Playbooks Series: The Growth CFO

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Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.