Working Capital Management Is Key Effective working capital management is essential to the success of any business. However, recent data from The Hackett Group, a leading digital transformation and strategy firm, shows that many companies are struggling to manage their working capital as efficiently as they have in the past. Their study found that the cash conversion cycle (CCC) deteriorated by an average of 1.3 days (or 4%) from 2022 to 2023, with industries like marine shipping, biotechnology, oil and gas, and food and staples retail seeing the largest declines. Here’s why working capital management matters and how your business can avoid this trend.
Why Working Capital Matters Working capital, the difference between current assets and liabilities, is essential to running your day-to-day operations smoothly. However, having too much tied up in working capital can hinder growth and reduce profitability. The right amount of working capital varies based on the nature of your business and industry. One key measure is the cash conversion cycle (CCC), which factors in three key elements:
- Days in accounts receivable outstanding
- Days in inventory outstanding
- Days in accounts payable outstanding
A positive CCC indicates the number of days your company needs to finance its operations while waiting for customer payments. A negative CCC reflects how long you can hold onto customer cash before paying your suppliers. Optimizing these components is critical for maintaining financial flexibility.
How to Shorten Your CCC Here are three actionable strategies to reduce the amount of capital tied up in your business:
- Accelerate collections. Tighten credit terms, offer early payment incentives, and streamline invoicing processes to collect cash from customers more quickly.
- Reduce inventory levels. Use technology to predict demand more accurately, improve supply chain efficiency, and avoid tying up excess capital in inventory that carries hidden costs like storage and insurance.
- Manage payables effectively. While deferring payments to suppliers can preserve cash, be cautious about extending them too long, as this can hurt relationships or cause missed discount opportunities.
Make Working Capital a Strategic Priority Many businesses focus too heavily on revenue and profits while overlooking the importance of balance sheet health—particularly working capital. Optimizing working capital isn’t just about improving your financial ratios; it’s about maintaining the liquidity needed to drive future growth.
Optimize Your Working Capital Effective working capital management is critical to your company’s financial health and long-term success. The Managed Accounting Services team at Reynolds + Rowella works with businesses to improve cash conversion cycles, enhance liquidity, and ensure financial stability. Our goal is to provide personalized solutions that address the specific challenges your business faces. Whether fine-tuning your receivables, optimizing inventory, or managing payables, we’re here to help you achieve better cash flow and operational efficiency. Don’t let inefficiencies in working capital management hinder your success. Contact Gregory Pepin and the Reynolds + Rowella team today to discuss how we can help your business build a more resilient
financial foundation.
Gregory Pepin, CPA, Partner
Gregory Pepin is one of Reynolds + Rowella’s tax partners and leads the firm’s Managed Accounting and Family Office Solutions Group. Greg specializes in tax consultation, planning, and compliance for closely-held businesses and high-net-worth individuals. Greg prides himself on being a trusted advisor to his clients for all their related financial matters. Greg is a member of the American Institute of Certified Public Accountants, the Connecticut State Society of Certified Public Accountants, CTCPA Professional Ethics Committee, Fairfield County Community Foundation – Rising Professional Advisory Council, past Trustee of the Keeler Tavern Museum and History Center Endowment Fund and past Connecticut Society of CPAs CPE/Networking Steering Committee. Greg is a board member of The Center for Empowerment and Education. Email Gregory
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
