A €220 billion opportunity in working capital in the Nordics

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Cash can be existential. While companies can weather disappointing performances, a company can run out of cash only once. Indeed, some companies have begun to divest assets to generate cash thanks to the end of the era of low inflation, rising interest rates, generally reliable supply chains, and low energy costs. Today, the time value of money is a much more important consideration than it has been in the past decade.

For many organizations, the solution to generating cash more quickly and with greater certainty than divesting assets is typically achieved by optimizing net working capital. To estimate the size of the cash opportunity, we examined the balance sheets of 250 large Nordic companies (those with headquarters in Denmark, Finland, Norway, or Sweden). Our analysis found that companies in the bottom quartile of the sample—as measured by the length of its cash conversion cycle—could increase their available cash by about €100 billion if they matched their median industry peers’ performance. Improving the performance of the companies currently in the bottom quartile to match that of the top quartile would release a total of about €220 billion in cash.

To decrease net working capital, functional leaders could optimize payables, receivables, and inventory management and could implement organizational support for cash management best practices in the current environment. While our analysis focuses on Nordic companies, the insights are globally applicable.

The current confluence of difficulties, including higher interest rates, snarled supply chains, and escalating energy costs, is a source of both challenge and opportunity: a challenge for companies that are not prepared to meet their cash needs and an opportunity for high performers. One company set up a dedicated cash control tower (a structured approach to conducting regular testing of receivables, payments, and inventory) to turn these challenges into opportunities, driving down current assets, optimizing current liabilities, and raising the profile of cash and its importance throughout the business.

The importance of capital efficiency has increased. But despite the known advantages of optimizing networking capital, organizations—and, crucially, leaders—that currently make decisions directly affecting net working capital have known low-interest-rate environments for only about 15 years. Organizational habits will need to change to operate effectively in the new macroeconomic environment.

Examining Nordic companies for ways to increase cash on hand

Lowering net working capital releases cash, which means more options. Doing so can offer companies the following benefits:

  • improving credit rating and allowing the company to borrow more cheaply
  • giving more options to invest in areas such as operations or giving the company opportunities to acquire assets
  • boosting enterprise value
  • creating a buffer against increasing operating costs

We analyzed the 2021 balance sheets of 250 companies with headquarters in the Nordic region, each of which had revenues of at least €300 million that year. The analysis suggests that if companies with bottom-quartile levels of net working capital matched median companies’ net working capital, they would free up about €100 billion.1 If bottom-quartile companies’ net working capital matched that of top-quartile companies in the sample, it would free up €220 billion in cash.

The median length of cash conversion cycles—the number of days it takes to convert inventory and other resources into cash flow from sales—varies (Exhibit 1).

The median length of cash conversion cycles varies by industry.

Cash conversion cycle = days sales outstanding (DSO)-days payables outstanding (DPO)+days inventory outstanding (DIO)

An industry-specific view of the elements of the cash conversion cycle suggests that top-quartile performers in each industry tie up 50 to 66 percent less capital in operations than their bottom-quartile counterparts in the same industry (Exhibit 2).

Companies in the top quartile tie up as much as 66 percent less capital in operations compared with bottom-quartile performers.

Breaking the cash conversion cycle into its components shows significant variance. This means that a company with an overall cash conversion cycle matching that of its peers may still have significant opportunities to improve. After all, robust performance in one component of the cash conversion cycle could disguise opportunities in another. Of course, any efforts related to net working capital should consider the industry in which each company operates. A breakdown into subindustries of capital goods, which itself is a subindustry of industrials, shows significant differences in the patterns of receivables, payables, and inventory.

It is important to consider each company’s performance in comparison to peers operating in the same industry.

Using the cash conversion cycle to decrease net working capital

Organizations that have successfully optimized net working capital have first established supportive governance, processes, and technologies to make this a priority throughout the business. The best way to optimize net working capital is to set up a dedicated team to examine the inputs of the cash conversion cycle: days inventory outstanding (inventory), days payable outstanding (DPO) (accounts payable), and days sales outstanding (DSO) (accounts receivable).


Less predictable global supply chains have prompted many companies to adopt just-in-case approaches to inventory management, a change from the just-in-time practices of the previous era. However, inventory management is not only about reducing inventory but also about optimizing the mix of inventory, including inputs.

Indeed, supply chain challenges do not affect all inventory equally. For instance, semiconductors have been notorious for being in short—or inconsistent—supply since the onset of the COVID-19 pandemic.2Strategies to lead in the semiconductor world,” McKinsey, April 15, 2022. Other components have been less affected. Even so, many organizations have reacted to inconsistent supply chains by stockpiling inventory, even for inputs that were not in short supply.

The key is to optimize purchasing and production for components that are the most difficult to source. This approach might be analogous to focusing on bottlenecks, which limit the speed of movement within their systems to the speed of the bottleneck.

At the tactical level, decision makers can use their inventory parameters as guides. To fulfill their intended function—to trigger purchases for more components and inputs to ensure the maximum sustainable flow of finished products—these parameters should evolve with changing conditions. Our experience suggests that most organizations would benefit from updating their parameters more often. Done correctly, this can not only reduce inventory levels overall but also improve general availability by optimizing the inventory mix. One industrial distributor identified an opportunity to reduce inventory by 25 percent and strengthened availability by introducing parameter-guided inventory management.

To be sure, optimizing parameters can be complex. It starts with segmenting customers by service level. Companies should have enough inventory in place to service customer demand at the right level with respect to promptness. Other inputs to the parameters should be the rate and timing of production, specific numbers and combinations of inputs, different suppliers’ reliability and lead times, and the level and variability of customer demand. Close collaboration between commercial teams and operations and supply chain teams in a forecasting sales and operations planning (S&OP) process allows organizations to continuously monitor inputs and update inventory parameters. One automotive supplier reduced total inventory levels by 15 percent in 12 months and aspires to further improve its performance.

In summary, we believe organizations can make a step change in inventory performance by doing the following:

  • defining target service levels across portfolios or differentiating across customers
  • setting parameter-guided inventory targets
  • ensuring close collaboration between commercial teams and supply to set an aligned forecast

Payables and receivables

DPO (the time companies have to pay suppliers) and DSO (the time companies have to collect payment from customers) directly influence the amount of cash on hand. As access to capital becomes more difficult (and costly), focusing on payables and receivables will become a more potent way to improve companies’ cash positions without making changes to earnings.

On the payables side, finance and procurement functions can free up cash by renegotiating payment terms with suppliers to at least be consistent with industry standards if terms are unfavorable. Companies could also adopt uniform payment terms for each supplier or for any suppliers that share a corporate parent.

Companies can also review their invoice processing practices to identify and eliminate early payments while staying within the bounds of agreed-upon terms. For instance, a company that pays five days early on €1 billion worth of annual procurement spend could free up to €14 million in cash by avoiding early payments.

Companies could also identify the payment cycle (the frequency of payments) that allows them to optimize efficiency and minimize errors. Many companies tolerate customers’ payment delays and suppliers’ quality and invoicing issues. Companies could recognize their roles as customers to their suppliers and strengthen relationships by using the power of the purse to enforce quality and invoicing expectations.

Supplier financing could also help companies with high credit ratings significantly extend payment terms. One company released €180 million in cash through those approaches, including by adjusting the timing and frequency of payments, tapping into supplier financing, and renegotiating contracts.

On the receivables side, companies could reduce their terms with customers. They can accomplish this through measures such as applying uniform terms for customers from the same parent entity, negotiating for reduced terms with existing customers, and setting more favorable terms with new customers.

Companies can use the invoicing process to expedite payments. This depends on improving the invoicing process itself: accelerating the pace of work, minimizing processing errors, and providing specific descriptions of goods and services on invoices to avoid delays on customer payments later.

Effective governance and processes, such as the dunning process, are essential to help reduce overdue payments. Companies could use their enterprise resource planning systems to automate sending reminders to customers on upcoming payments ahead of the due date, as well as sending weekly dunning letters (including overdue payment interest) and reevaluating the credit limits of customers that consistently pay late. Companies could also consider factoring, which helps finance a part of the accounts receivable, so that payments arrive earlier.

In most organizations, using payables and receivables to gain a better cash position requires cross-functional collaboration. Disparate stakeholders’ input could help decision makers evaluate options, identify current behaviors and opportunities, act in a coordinated way, and present a united front to customers and suppliers. One global manufacturing company paired its finance and procurement functions to optimize its payables and receivables. The joint team’s analyses produced a staged plan to improve invoice handling and implement a supplier-financing offering. As a result, the company aims to reduce the amount of cash tied up in payables and receivables by 8 percent within 12 months.

In short, to improve payables and receivables, we recommend that companies do the following:

  • Review existing terms negotiated with customers and suppliers and move toward industry standards (if the terms are currently worse than that).
  • Strengthen processes for timely payment and invoicing execution and reminders.
  • Explore supplier-financing setups with relevant suppliers.

In most organizations, using payables and receivables to gain a better cash position requires cross-functional collaboration.

Support for optimized cash management

Setting up the elements of the cash conversion cycle to optimize (and usually lower) net working capital requires supportive elements beyond simply putting changes in place. The undertaking would require updated governance and new practices that make achieving and maintaining new ways of working easier.

At the most basic level, an updated governance process can help embed the oversight and accountability necessary to ensure that the organization consistently adheres to the optimal approaches toward receivables, payables, and inventory. To help the organization maintain focus, new habits should receive ample leadership attention and be reinforced by clear rules, authorization matrices, and systemic checks.

Organizations could—and should—also invest in a way that makes outsize results more likely. For instance, an agile manufacturing site could boost production efficiency with optimized batch sizes. Advanced analytics could help the production, supply chain, and sales functions update inventory parameters with the necessary rigor. And process automation could help streamline operations in accounts payable and receivable. One global industrial company identified inventory reductions of up to 25 percent. Those reductions (and associated savings) came from improved production scheduling and strengthened governance related to made-to-order products, which had been held in inventory for longer than necessary.

We have found that installing a dedicated control tower focused on cash is an effective way to centralize and coordinate approaches to optimizing cash, ensure the right attention level, and ensure that any improvements are sustainable.

As such, we believe the following elements enable the journey to release cash from the operations:

  • Include receivables, payables, and inventory as a regular part of the governance process, including by tracking performance indicators.
  • Consider a control tower function to monitor cash-optimizing actions.
  • Invest in long-term enablers of further cash optimization, such as heightened site agility and improved analytics.

Cash management is both a challenge and an opportunity for companies to pull ahead of their competitors. Done right, it can bring benefits such as higher return on capital, greater stability and resilience, and valuation that outperforms the competition. In short, cash is still king.

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