10 Powerful ways to improve working capital for business growth

Working capital is the lifeblood of every successful business. Without it, even the most promising enterprises can face liquidity crises, stunted growth, or missed opportunities. For finance managers, CFOs, and other financial leaders, optimizing working capital isn’t just a numbers game; it’s a strategic key that can unlock greater efficiency, resilience, and profitability. 

This guide dives into 10 powerful methods to help finance leaders significantly improve working capital and ensure their businesses stay agile and competitive. 

1. Accelerate accounts receivable 

Research from Fundbox states that 64% of small businesses are affected by unpaid invoices, with an average of $84,000 in outstanding payments at any given time. A study by Atradius reported that 48% of B2B invoices in North America are overdue, causing significant cash flow challenges.

Thus, one of the best ways to improve working capital is by reducing the time it takes to collect customer payments via accounts receivable. Faster collections mean more liquidity and fewer issues managing daily operations. 

How to achieve this: 

• Strengthen invoicing practices: Ensure invoices are accurate, detailed, and sent immediately after service delivery. 
• Introduce early payment discounts: Incentivize customers to pay ahead of time by offering discounts on early settlements. 
• Use digital invoicing tools: Automation software can track outstanding payments, send reminders, and collect electronically, minimizing human error. 

The quicker payments come through, the more room businesses have to reinvest without relying on additional financing.

Implementing digital invoicing solutions has been shown to reduce late payments by up to 70%, as highlighted by PayStream Advisors. Offering early payment discounts can lead to a 10-15% increase in on-time payments, according to the Credit Research Foundation.

2. Extend accounts payable  

Negotiating more favorable payment terms with suppliers can help finance teams retain cash for longer periods, improving liquidity without disrupting operations. 

Recent studies highlight the benefits of extending payment terms and employing supply chain finance solutions. Businesses that implement extended payment terms effectively can reduce their working capital requirements by up to 20%, a report by PwC states. Furthermore, the Hackett Group found that leveraging supply chain finance platforms can improve cash flow by as much as 15% while maintaining positive supplier relationships.

How to achieve this:

• Open conversations with vendors about extending net payment terms (e.g., from 30 days to 60 days). 
• Use supplier relationships strategically and spread payments across staggered cycles. 
• Leverage supply chain finance platforms to pay suppliers directly while reimbursing the platform later. 

3. Optimize inventory management 

Excess inventory ties up working capital while insufficient stock risks lost sales. Striking the balance between demand and inventory is crucial for the ideal amount of working capital. 

Businesses that utilize demand forecasting tools can reduce inventory costs by up to 10%, while a just-in-time (JIT) inventory system has been shown to decrease inventory carrying costs by as much as 25%, a report by the National Retail Federation states.

The report also found that regular inventory audits can help enhance accuracy by identifying up to 95% of undervalued or obsolete inventory, which then enables timely actions to recover costs.

How to achieve this:

• Use demand forecasting tools to predict purchasing needs accurately and avoid overstocking. 
• Implement a just-in-time (JIT) inventory system to ensure materials arrive exactly when needed, reducing holding costs and waste. 
• Regularly audit your inventory to identify slow-moving items, which can then be discounted or liquidated. 

4. Enhance cash flow forecasting 

When cash flow forecasts are precise, finance teams can anticipate liquidity fluctuations and make real-time decisions to keep working capital flowing. The proof:

Businesses leveraging AI-driven forecasting platforms can achieve up to a 20% increase in forecast accuracy, a Gartner report states. Additionally, companies that integrate rolling forecasts experience a 10-15% improvement in financial agility by accounting for real-time market changes (PwC, 2022). Finally, a Deloitte study concluded that cross-department data alignment can reduce working capital cycle times by 25%.

How to achieve this:

• Adopt AI-driven forecasting platforms capable of analyzing historical trends and external factors for better predictions. 
• Incorporate rolling forecasts to factor in changing market conditions. 
• Align cross-department data to ensure visibility into receivables, payables, and inventory turnover cycles. 

5. Implement supply chain finance solutions 

By introducing supply chain finance (SCF) programs, businesses can unlock liquidity trapped within their supply chains. SCF bridges the gap between accounts payable and accounts receivable by involving a third-party financial institution. 

How to achieve this:

• Choose suppliers who would benefit from early payments or extended payment terms. 
• Partner with a financial institution or SCF provider and negotiate the terms and conditions. 
• Establish a transparent process for invoice submission, approval, financing, and repayment. 
• Register, integrate, and onboard suppliers into the SCF platform

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6. Leverage technology and automation 

Manual financial processes are not only time-consuming but also prone to errors that disrupt cash management. Modern technology can streamline working capital management, freeing up finance teams to focus on strategic initiatives. 

McKinsey & Company found that businesses that implement advanced automation tools in financial operations can achieve up to a 30% reduction in processing costs and a 25% improvement in process efficiency. Those Companies that utilize predictive analytics for cash flow management have reported a 20-50% increase in forecast accuracy,

How to achieve this:‍

• Use AI automation tools for invoicing and payments to reduce delays and errors. 
• Integrate financial data systems that offer real-time cash visibility across multiple accounts and regions. 
• Implement predictive analytics to identify trends and opportunities to improve working capital cycles. 

7. Renegotiate supplier contracts 

Vendor agreements should evolve alongside your business. Revisiting and renegotiating supplier contracts can unlock benefits that directly impact working capital. 

Early payment discount programs could save companies an average of $2.5 million per $1 billion in annual spend, according to The Hackett Group. Additionally, leveraging volume-based pricing strategies can result in bulk savings of 5-10%, especially for industries reliant on high-frequency procurement.

How to achieve this:

• Early payment discounts: Offer suppliers payments ahead of schedule in exchange for discounts, reducing your total expenditure. 
• Volume-based pricing: Consolidate orders to achieve bulk discounts where possible. 

8. Reduce unnecessary expenses 

Excessive or unwarranted spending eats into working capital. A comprehensive cost analysis (i.e. regular audits) can help businesses identify areas for immediate savings and reduce operational expenses by up to 15%. Organizations that adopt lean practices report an average efficiency improvement of 20%(McKinsey & Company). Examples of lean practices can include consolidating supplier relationships—proven to lower procurement costs by 10-12%, based on research from the Institute for Supply Management.

How to achieve this:‍

• Perform monthly audits to highlight inefficiencies and reduce non-essential spending (e.g., unused software subscriptions). 
• Introduce lean business practices to eliminate waste across operations. 
• Consolidate vendor relationships to streamline procurement costs and cash outflow. 

Reducing unnecessary expenses bolsters operational efficiency while increasing available cash reserves.

9. Improve pricing strategies 

The right pricing model can directly affect margins and working capital health. Align your pricing strategies with market demands and optimize them for profitability. 

How to achieve this:‍

• Use dynamic pricing tools to respond to real-time market fluctuations. For example, offer premium pricing during peak demand. 
• Identify margin improvement opportunities by bundling products or services. 
• Periodically review pricing structures to ensure they reflect market benchmarks. 

Enhanced pricing not only boosts revenues but ensures all aspects of your supply chain remain profitable. 

10. Consider alternative financing options 

Traditional financing methods are not always the best solution. Innovative financing solutions can improve liquidity without materially increasing debt levels. 

How to achieve this:

• Invoice factoring: Sell your unpaid invoices to a third party for immediate liquidity. 
• Supply chain financing: Collaborate with a financial institution to provide early payment to suppliers while extending payable terms. 
• Asset-based lending: Use inventory, accounts receivables, or other assets as collateral to secure working capital financing. 

Invoice factoring has become a widely utilized tool for businesses, with the global factoring market valued at approximately $3.5 trillion in 2022. Studies show that companies using supply chain financing can reduce payment cycles by up to 40%, driving stronger supplier relationships and operational efficiency.

Asset-based lending is also a strategy worth exploring as it continues to grow in popularity, accounting for around 30% of working capital solutions for small to medium enterprises (SMEs). 

Though these statistics underscore the effectiveness of alternative financing strategies, success can depend on the industry. 

Industry-specific considerations 

Each industry faces unique challenges and opportunities when it comes to optimizing cash flow and selecting the most effective financial solutions. Here’s a quick breakdown of three major industries and the strategies that work best.

Retail 

Retail businesses should prioritize strategies like just-in-time (JIT) inventory management to reduce holding costs and ensure capital is not tied up in slow-moving stock. Monitoring market trends and consumer demand closely can help retailers optimize inventory turnover and maintain cash flow resilience. Additionally, partnerships with suppliers to negotiate flexible payment terms or bulk discounts can further enhance liquidity management. 

Manufacturing 

For manufacturing industries, improving supplier payment terms while balancing raw material inventory is crucial for sustaining operations. Leveraging supply chain financing can create a win-win situation, providing early payments for suppliers and extending payable terms for manufacturers. Furthermore, implementing lean manufacturing practices can minimize waste and streamline production costs, ensuring optimal working capital efficiency. 

B2B Services 

B2B service providers can accelerate receivables by adopting strategies like retainer agreements, which secure upfront payments, and milestone-based billing to maintain steady cash flow during long projects. Utilizing digital invoicing systems can also reduce payment delays and facilitate transparent, real-time tracking of outstanding invoices. Clear communication with clients about payment terms is key to avoiding disruptions and maintaining cash flow stability. 

Government relief and schemes 

Government relief programs and financial schemes can provide support to businesses looking to improve working capital. Tax relief initiatives, such as R&D tax credits and VAT deferment programs, can reduce immediate tax liabilities, freeing up cash to address operational needs.

Government grants designed to stimulate business growth, particularly in innovation, sustainability, or regional development, can offer substantial financial injections without repayment obligations. Leveraging these resources, alongside professional guidance to ensure compliance, enables businesses to strengthen their cash flow and sustain operations effectively.

Stronger liquidity, greater flexibility 

By adopting these 10 strategies, finance managers, CFOs, and controllers can achieve a healthier working capital cycle that fuels growth, improves resilience, and aligns with business objectives. But optimizing working capital is more than a task; it’s a continuous process that evolves with changes in market conditions, customer behavior, and your business strategy.

Panax helps lean finance teams to optimize their working capital, by giving them full visibility and control over everywhere their cash is. Within the Panax platform finance professionals can run automated AR reconciliation, to reduce time spent on manual matching, and can run flexible, accurate AI-driven forecasts. Panax helps finance professionals to work smarter, not harder, so they can optimize liquidity and reduce cash risks.