Working capital is a company's lifeblood – it keeps day-to-day operations running. According to the Bank of Finland, a shortage of working capital is the most common financing problem for Finnish SMEs. Yet more than half of SMEs do not actively monitor their working capital turnover. In this guide we cover how to optimise working capital and why it is critical for growth.
What Is Working Capital and How Is It Calculated?
Working capital is the capital tied up in a company's short-term assets needed to run daily operations. The basic formula is straightforward: working capital = inventories + accounts receivable − accounts payable. Positive working capital means the company must finance part of its operating cycle with its own funds or debt.
The need for working capital varies significantly by industry. In retail, where goods are sold before suppliers are paid, the working capital requirement can be small or even negative. In manufacturing and construction, where materials are purchased upfront and clients pay afterwards, the working capital requirement is often large.
According to Statistics Finland, the average working capital cycle for Finnish SMEs is 47 days. This means every euro a company invests returns to the cash register after an average of 47 days. Every day you shorten this cycle frees capital.
Cash Conversion Cycle – Working Capital Turnover
The Cash Conversion Cycle (CCC) is the single most important metric in working capital management. It tells you how many days it takes before the money a company invests returns to the cash register. CCC consists of three components: days inventory outstanding (DIO), days sales outstanding (DSO), and days payable outstanding (DPO).
The formula is: CCC = DIO + DSO − DPO. For example, if inventory turnover is 30 days, receivables turnover is 45 days, and payables turnover is 25 days, CCC is 30 + 45 − 25 = 50 days. This means 50 days' worth of capital is tied up in every sales euro before it returns to the cash register.
CCC's three components:
- DIO (Days Inventory Outstanding) – inventory turnover: how many days goods sit in inventory before being sold
- DSO (Days Sales Outstanding) – receivables turnover: how many days it takes before the customer pays
- DPO (Days Payable Outstanding) – payables turnover: how many days the company has to pay suppliers
CCC by Industry in Finland
Working capital turnover varies significantly across industries. The following figures are based on Statistics Finland's financial statements data and my own observations in the financing sector.
Typical CCC values by industry:
- Retail: 5–15 days (fast inventory turnover, short payment terms)
- Wholesale: 25–45 days (larger inventory, longer B2B payment terms)
- Manufacturing: 40–70 days (raw material inventory + production + payment terms)
- Construction: 50–90 days (long projects, slow payments)
- IT and consulting: 20–40 days (no inventory, but long payment terms)
- Transport: 30–50 days (fuel + insurance, 30–60 day payment terms)
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Optimising Accounts Receivable
Accounts receivable are often the single largest item tying up working capital in SMEs. Shortening DSO is the most effective way to improve working capital. Approaches are divided into two categories: shortening payment terms and accelerating payments.
Receivables optimisation methods:
- Invoice immediately upon work completion – every day of invoicing delay is a lost day
- Offer early payment discounts for prompt payment (e.g. 2/10 net 30)
- Automate payment reminders – send the first reminder before the due date
- Check clients' credit ratings before granting payment terms
- Use invoice financing to convert receivables into immediate cash flow
- Interim invoicing for partially completed work in long projects
As an entrepreneur, I have found that simply speeding up the invoicing process can shorten DSO by 5–10 days. Combined with systematic collection and invoice financing when needed, DSO can shorten by 15–20 days – freeing significant capital.
Optimising Inventory
Inventory is tied-up capital that generates nothing until it is sold. The goal of inventory optimisation is to keep stock levels as low as possible without compromising delivery reliability. This is often a balancing act: too little inventory causes delivery disruptions, too much ties up capital unnecessarily.
Inventory optimisation strategies:
- ABC analysis: Classify products by sales – A-items are always in stock, C-items are ordered only when needed
- Just-in-time (JIT): Order materials as close to the point of need as possible
- Supplier collaboration: Negotiate faster delivery times so you can reduce inventory
- Clearing slow movers: Identify and dispose of slow-moving products through clearance sales
- Demand forecasting: Use historical data and analytics to optimise orders
Managing Accounts Payable
Accounts payable are the third component of working capital and the only one where a longer turnover period benefits the company. Longer payable terms mean the company uses supplier financing to run its operations. This is effectively interest-free credit.
Balance is important, however. Demanding excessively long payment terms can damage supplier relationships and even lead to poorer prices or delivery conditions. In addition, taking advantage of early payment discounts may be more financially beneficial than a long payment term.
Example of working capital release: A company with EUR 1,000,000 annual invoicing shortens its CCC by 10 days. Capital released: EUR 1,000,000 x 10 / 365 = approximately EUR 27,400. This sum is freed as a one-time effect for the company's use.
Working Capital Optimisation During Growth
Growth is working capital's greatest challenge. When revenue grows, working capital needs also grow – often faster than cash flow. This is a paradox: a profitable and growing company can end up in a cash crisis because money is tied up in inventory and receivables faster than it returns to the cash register.
I have seen several growth companies where exactly this problem has led to serious difficulties. In one case, an IT company grew 50% annually, but cash flow could not keep up because large clients paid on 60-day terms. Invoice financing resolved the situation and enabled continued growth.
Growth-phase working capital strategies:
- Anticipate working capital needs as revenue grows – calculate CCC before and after growth
- Secure working capital financing before the need becomes acute
- Use invoice financing to fund growth without increasing debt
- Negotiate more flexible payment terms with suppliers
- Require advance payments from new clients in the early stages
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Working Capital Monitoring Metrics
Working capital optimisation requires continuous monitoring. The following metrics should be checked at least monthly.
Metrics to monitor:
- CCC (Cash Conversion Cycle) – working capital turnover in days
- DSO (Days Sales Outstanding) – receivables turnover
- DIO (Days Inventory Outstanding) – inventory turnover
- DPO (Days Payable Outstanding) – payables turnover
- Current Ratio – ratio of current assets to current liabilities (target: 1.5–2.0)
- Quick Ratio – liquidity metric excluding inventory (target: > 1.0)
Summary
Working capital optimisation is an ongoing process consisting of three areas: speeding up receivables, reducing inventory, and sensibly managing payables. The Cash Conversion Cycle is the most important metric, and shortening it concretely frees cash for growth. Finnish SMEs have significant optimisation potential – according to Statistics Finland, the average CCC is 47 days, and many companies could shorten it by 10–20 days with proactive measures.
📌 Summary
Working capital optimisation unlocks hidden capital for growth. CCC = DIO + DSO − DPO is the key metric. Optimise receivables with prompt invoicing and collection, reduce inventory with ABC analysis, and negotiate sensible payment terms with suppliers. During growth phases, invoice financing is an effective tool for securing working capital.
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