The short answer
A company can be profitable and still have no money in the bank. The difference between profit and cash is, in most cases, working capital: the money tied up between paying the supplier and being paid by the customer.
Three levers set its size – receivables, inventory, payables – and they act at different speeds. Receivables are the fastest, because they need no investment and the effect shows up in the bank account within a quarter.
What one day is worth
The most useful calculation in the whole discipline is also the simplest. At twelve million euros of annual revenue, one day of receivable time is roughly EUR 33,000 of tied-up capital. Taking the cash conversion cycle from 75 to 60 days therefore frees around half a million euros – once, but permanently available, and without a single euro of extra revenue.
That number belongs at the start of every project. It turns an abstract topic into a figure you can discuss with the board.
Lever 1: receivables
DSO is the part of working capital that responds fastest. In practice the cause is rarely the customer:
- Invoiced too late. Batching invoices at month end adds up to 15 days to DSO – without anyone paying late. Daily invoicing is the cheapest lever there is.
- Dunning without dates. Stages, fixed deadlines, a named owner. Not by instinct and not „when there is time".
- Payment terms nobody negotiated. Many terms are simply historical. A look through the contract list regularly turns up 60-day terms nobody can justify any more.
- No deposits on long projects. 30 percent on order, 40 percent on partial acceptance, the rest on completion – common in many sectors and still often not asked for.
Lever 2: inventory
Slower, but durable. The entry point is an ABC-XYZ analysis: which items carry the value, and which of those move reliably? The typical finding is a small number of items with high capital tied up and low turnover – and a safety stock that arose from a supply shortage at some point and has never been reviewed since.
Careful in the other direction: reducing stock to the point of not being able to deliver costs revenue and customers. The target is not zero but a justified level of cover per product group.
Lever 3: payables
Longer supplier terms work immediately – with two caveats. First, early-payment discount is usually worth more than the cash benefit: three percent for 30 days' difference is an annualised rate of roughly 36 percent. Second, unilaterally stretching payment is not a working capital measure but a supplier crisis in instalments.
The clean route is negotiation: longer terms in exchange for volume commitments or planning certainty.
When the money is still missing: factoring
If internal optimisation is not enough, factoring is the next step – selling the receivables to a financier. Non-recourse factoring takes the receivable off the balance sheet and improves the equity ratio, which helps additionally where covenants apply.
The benchmark is the credit line, not zero. And the order matters: funding a self-inflicted 60-day DSO through factoring buys time and pays margin permanently for it, without touching the cause.
The order that works
- Measure. DSO by the counting-back method, inventory cover per product group, DPO. A monthly series over 24 months, not one balance-sheet date.
- Work out what a day is worth. That single number decides whether the project gets priority.
- Invoicing and dunning first. Costs nothing, works within weeks.
- Inventory and payment terms in parallel. Both need conversations – with purchasing and with suppliers.
- External financing last. Only once the internal levers are pulled is a factor's price justified.
- Track monthly. Without a fixed reporting line the balance drifts back to its old level within two quarters.
The five mistakes
- Looking only at the average. A DSO of 45 days can be a process problem or one large customer at 120 days. The measures are completely different.
- A cut-off date instead of a series. With seasonality, a single balance-sheet date distorts the picture so badly that no measure can be derived from it.
- Ignoring early-payment discount. The most expensive credit in the business is usually the one taken from suppliers.
- Cutting stock without keeping delivery capability. Working capital is not an end in itself.
- A one-off project instead of a routine. Without a monthly metric and an owner, the effect is gone within two quarters.
Frequently asked questions
What is a good working capital level?
There is no universal target – it depends on sector and business model. Two comparisons are useful: your own trend over 24 months, and the sector benchmark. A cash conversion cycle of 75 days is unremarkable in machinery and an alarm signal in food retail.
How fast does working capital optimisation work?
Invoicing and dunning work within four to eight weeks. Renegotiated payment terms take effect from the next contract cycle. Inventory reduction needs one to two quarters. Expect a noticeable effect after a quarter and the full effect after a year.
Why is a profitable company sometimes illiquid?
Because profit arises when the service is delivered and cash arises when it is paid. In growth, receivables and inventory rise with revenue, and the capital tied up rises with them. That is exactly why growth without working capital management is a liquidity risk.
What is one day less of DSO worth?
At twelve million euros of annual revenue, roughly EUR 33,000. The formula: annual revenue divided by 365. The same arithmetic applies to every day in the cash conversion cycle.
Is factoring worth it?
Once the internal levers are pulled and working capital grows faster than the credit line: yes. As a substitute for missing dunning: no – that pays permanent costs for a problem solvable at no cost.
Who should own the topic?
Finance measures and steers, but the levers sit in sales (payment terms), purchasing (supplier terms) and logistics (inventory). Without a target anchored in those areas it stays an analysis with no effect.
Read on
- Working capital – definition, calculation and its role in a company sale.
- Cash conversion cycle – formula, worked example and limits.
- Days sales outstanding – calculation and the five levers.
- Factoring – recourse and non-recourse, cost and balance sheet effect.
- 13-week cash flow forecast – the early-warning system these measures feed into.
- CFO as a Service at nugrow – when the steering role needs filling permanently.
Sources and status
The worked examples are model calculations for illustration; the underlying formulas are in the linked glossary entries. The remaining statements draw on nugrow's mandate practice. As of September 2026. This article is an overview and does not replace tax or legal advice.
