In today’s fast-changing business landscape, effective working capital management is essential for organizations seeking financial resilience and strategic growth.

According to The Guide to Excellence in Treasury—an eBook by CTMfile and Strategic Treasurer—working capital in treasury is best understood as net adjusted working capital:

(Accounts receivable + inventory – accounts payable)

This differs from the traditional accounting definition of current assets – current liabilities. While both are valuable, the net adjusted approach offers a clearer picture of the cash conversion cycle (CCC)—a critical focus area for treasury teams striving to manage liquidity effectively.*

Corporate treasury is uniquely positioned to lead working capital management efforts. With its comprehensive view of organizational finances and close alignment with strategic objectives, treasury can identify inefficiencies, foster cross-functional alignment, and drive improvements that directly enhance cash flow, asset utilization, and enterprise value.

Because working capital directly influences a company’s liquidity, profitability, and valuation, treasurers should not only support but take ownership of managing and optimizing it. This requires collaboration across finance, procurement, and operations to build a unified, metrics-driven approach that strengthens financial stability, supports growth, and sustains a competitive edge—even amid uncertainty.

The Executive Guide: Selecting the Right Treasury Metrics from the Association for Financial Professionals® (AFP) reinforces this perspective, emphasizing the importance of quantifiable metrics for evaluating performance, monitoring progress, and facilitating productive stakeholder conversations.

The following sections—drawn from AFP’s Executive Guide—explain six key metrics that enable corporate treasury and finance leaders to boost working capital efficiency and effectiveness and improve financial performance in challenging times.

1. Total working capital: This metric reflects the amount of capital or resources available to fund a company’s operations and short-term obligations. For corporate treasury, monitoring total working capital provides a holistic view of liquidity and operational health. A positive balance suggests adequate liquidity to support ongoing business activities and growth, while a negative balance may indicate overreliance on short-term financing or potential cash flow strain. Treasury executives use this measure to assess how efficiently the organization’s assets are being converted into cash and to determine whether adjustments are needed in receivables, payables, or inventory management to bolster liquidity.

2. DSO (Days sales outstanding): Dean M. Leavitt, Founder & CEO, Boost Payment Solutions, defines DSO in his CTMfile article What Is DSO? A Beginner’s Guide to Reducing Days Sales Outstanding as “The average number of days it takes a business to collect payment after a sale has been made.” He notes that DSO is a critical indicator of accounts receivable efficiency, offering valuable insight into how effectively a company converts sales into cash. Leavitt adds that while a DSO of around 45 days is often considered typical, benchmarks vary widely by industry. A high DSO signals delayed payments and reduced financial flexibility, whereas a low DSO reflects efficient collections and faster access to cash—both of which strengthen working capital.

3. DPO (Days payable outstanding): DPO measures the average number of days a company takes to pay its suppliers after receiving invoices. This metric is crucial in understanding accounts payable efficiency and supplier relationship management. From a treasury perspective, optimizing DPO is a balancing act. Extending payment terms can augment liquidity and free up cash for operational needs, but excessive or persistent delays may strain supplier relationships or lead to missed early-payment discounts. Conversely, paying too quickly can unnecessarily reduce available cash. Treasury teams therefore aim to maintain a strategic DPO range that supports strong supplier partnerships while optimizing cash flow to meet liquidity objectives.

4. Working capital as a percentage of sales: Working capital as a percentage of sales assesses how effectively a company deploys its working capital to generate revenue. This metric provides a ratio that helps determine whether the business is tying up too much—or too little—capital in daily operations. A lower percentage generally indicates more efficient use of working capital, suggesting the company can generate higher sales with less capital investment. However, excessively low levels may signal underinvestment in inventory or insufficient agility to handle demand spikes. Treasury professionals track this ratio to ensure that liquidity aligns with sales goals and overarching growth strategies.

5. Impact of collection terms on working capital: Collection terms—the payment periods offered to customers—have a direct bearing on working capital effectiveness. Lengthy collection terms can delay cash inflows, increase DSO, and constrain liquidity, while shorter terms accelerate cash conversion and strengthen cash flow predictability. Treasury teams often collaborate with sales and finance departments to evaluate whether current collection terms align with market norms and company priorities. Techniques such as dynamic discounting or early-payments incentives can shorten the collection cycle without compromising customer relationships. By optimizing collection terms, treasury enhances cash flow reliability, reduces financing needs, and improves overall working capital performance.

6. Impact of payment terms on working capital: Just as collection terms influence inflows, payment terms shape cash outflows and affect supplier relationships. Extending supplier payment terms strategically allows an organization to retain cash longer and boost short-term liquidity. However, doing so excessively can erode supplier trust, disrupt supply chains, or lead to higher costs. Treasury’s objective is to design payment terms that maximize working capital effectiveness while supporting long-term business partnerships—not merely to delay or defer payments.

To sum up, in a volatile economic environment, corporate treasury’s stewardship of working capital metrics has never been more vital. By continuously monitoring and interpreting measures such as total working capital, DSO, DPO, and the effects of collection and payment terms, treasurers can make data-driven decisions that bolster liquidity, strengthen resilience, and drive enterprise value—helping their organizations thrive even in uncertain times.

 

 ⃰ Disclosure: Strategic Treasurer owns CTMfile.