Industrial Manufacturing and Consumer Goods Podcast: Working Capital Optimization Explained

ANNOUNCER: Welcome to the Cherry Bekaert Industrial and Consumer Goods Podcast series. We explore this dynamic world, discuss operating challenges facing manufacturers, and offer new ideas and solutions. Join us as we uncover growth strategies and enhance after-tax cash flow in the industrial and consumer goods landscape.

HOST: MIKE PIOTROWSKI: Today we begin a five-part deep dive on working capital optimization. I am a finance transformation professional in our CFO ADVISORY practice, and joining me is Corey York, a seasoned expert in financial strategy and my colleague in our CFO ADVISORY practice.

GUEST: COREY YORK: Thanks for having me, Mike. My true expertise is the consumption of carbohydrates, but I'm always happy to talk about making businesses financially stronger.

HOST: MIKE PIOTROWSKI: Let's start with the big question, Corey. Why is working capital so important?

GUEST: COREY YORK: Working capital is the lifeblood of a business. It provides the resources to pay expenses, cover financial obligations, and seize growth opportunities. Adequate working capital ensures a company can pay employees and suppliers on time and handle unexpected cash flow challenges; conversely, poor working capital management can lead to missed payments and the inability to invest in strategic initiatives. It is critical for operational stability and financial flexibility.

HOST: MIKE PIOTROWSKI: What exactly is working capital?

GUEST: COREY YORK: The concept is straightforward. It is the money a business has readily available to cover short-term obligations. The basic calculation from a financial statement perspective is current assets minus current liabilities.

HOST: MIKE PIOTROWSKI: Current assets are cash, accounts receivable, and inventory, right? Current liabilities are short-term debts like accounts payable, salaries, and short-term loans?

GUEST: COREY YORK: Exactly. Working capital impacts cash flow. There are three primary levers: inventory, accounts receivable, and accounts payable.

GUEST: COREY YORK: Inventory is your stock of goods and materials. Excess inventory consumes cash and reduces liquidity, while too little can cause stockouts and missed sales. Efficient inventory management frees up cash without hurting sales, and there is an optimal level to target.

GUEST: COREY YORK: Accounts receivable is money owed by customers. Slower collections lock up cash; speeding collections improves cash on hand. Strategies include timely invoicing and discounts for early payment to convert sales to cash faster.

GUEST: COREY YORK: Accounts payable is money owed to vendors. Managing payables well can provide short-term financing by negotiating longer payment terms or paying on the due date. You must balance preserving vendor relationships and taking early payment discounts when analysis shows a benefit.

GUEST: COREY YORK: Cash is king. A company can be profitable on paper but go bankrupt without cash to pay employees or vendors.

HOST: MIKE PIOTROWSKI: Can you explain some of the key metrics used to assess working capital?

GUEST: COREY YORK: Two common ratios from accounting are the current ratio and the quick ratio. The current ratio is current assets divided by current liabilities; a healthy benchmark is often around two-to-one. The quick ratio is current assets minus inventory, typically cash and accounts receivable, divided by current liabilities; it gives a more immediate picture of liquidity because it excludes inventory.

GUEST: COREY YORK: More advanced working capital metrics include days sales outstanding (DSO), days inventory outstanding (DIO), and cash flow efficiency (CFE). These metrics provide deeper insight into collection, inventory turnover, and overall cash conversion.

HOST: MIKE PIOTROWSKI: To put it simply, positive working capital indicates the company can meet short-term obligations and invest in growth, while negative working capital signals potential liquidity problems. Is that right, Corey?

GUEST: COREY YORK: That is correct.

HOST: MIKE PIOTROWSKI: Where do symptoms of working capital issues typically show up?

GUEST: COREY YORK: On the receivables side, you may see increasing aging in accounts receivable and rising bad debt as customers fail to pay. For inventory, you could have obsolete or surplus stock, space constraints, or stockouts that prevent sales. For payables, you might see missed payments or less favorable terms. In cash management, you may observe over-reliance on borrowing, delayed payroll—which is a cardinal sin for labor relations—and bank overdraft fees.

HOST: MIKE PIOTROWSKI: How do these components interact in the working capital cycle?

GUEST: COREY YORK: The cash conversion cycle, or CCC, is DSO plus DIO minus days payables outstanding (DPO). It measures how quickly a company can turn investments into cash. The shorter the cycle, the faster the cash flow; optimization aims to reduce that cycle time by improving each component.

HOST: MIKE PIOTROWSKI: What are the key benefits of optimizing working capital?

GUEST: COREY YORK: Effective working capital management improves liquidity, giving you more cash on hand. It reduces costs by lowering the need to borrow and decreasing storage and excess inventory expenses. It can also increase operational efficiency and profitability, making a company more agile and better able to respond to opportunities or weather crises without scrambling for cash.

GUEST: COREY YORK: Breaking this down by area, faster receivables collections improve cash flow and reduce default risk. Better-managed payables help build stronger supplier relationships, provide access to better terms or discounts, and enhance reputation. Cash management reduces the need for short-notice financing and improves preparedness for emergencies. Inventory optimization leads to leaner operations, lower excess and obsolescence expenses, improved supplier collaboration, reduced storage costs, and less damage and waste.

HOST: MIKE PIOTROWSKI: Any final thoughts for listeners thinking about their own working capital?

GUEST: COREY YORK: Don’t overlook your working capital. It is a hidden source of value in your financial statements every month. Refresh these metrics, examine deeper ones, identify trends and inefficiencies, and recognize that even small improvements can yield meaningful results in cash flow, stability, and agility.

HOST: MIKE PIOTROWSKI: Thank you, Corey, and thank you all for tuning in to the Industrial and Consumer Goods Podcast.

ANNOUNCER: Thank you for listening to our podcast today. For more information, visit our website at cbh.com/manufacturing, where you can give feedback and connect with our professionals.

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