Building optionality: Balance sheet discipline is both timely and timeless

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The macroeconomic outlook might be even more uncertain now than it was a year ago, which is saying something. Geopolitical risks, strong labor markets, persistent inflation, yo-yoing consumer sentiment, and a host of other confused signals have left business leaders with little certainty about the future. As central banks lift rates, external financing is becoming more difficult for companies across sectors.

“Where can we get financing?” For many, the answer is to look within. Previous McKinsey research has found that businesses that preserve optionality—the ability to quickly deploy cash to fund investments for long-term value creation—outperform those that don’t.1Planning for 2023: How US-based businesses can succeed when capital and talent are constrained,” McKinsey, December 16, 2022.  Maximizing such optionality requires disciplined management of the balance sheet. Critically, that means what we call “cash excellence” (a set of best practices that stress prudence and liquidity). Cash excellence can provide companies the vital optionality to invest while others remain challenged. Not only that, some companies are so cash excellent that they effectively enjoy a cost-free source of funds.

Cash excellence can provide companies the vital optionality to invest while others remain challenged. Some companies are so cash excellent that they effectively enjoy a cost-free source of funds.

Of course, managing cash isn’t just important for organizations that struggle with financing. Effective cash management directly improves ROIC and return on capital employed—two vital metrics that attract investor confidence. And a renewed focus on cash can last beyond short-term ups and downs to translate to long-term outperformance.

It all starts with a full review of the balance sheet for cash-releasing opportunities. Simultaneously, leaders can strengthen the cash culture across their organizations by changing underlying systems and mindsets and by implementing no-regret moves to embed cash excellence into ongoing operations.

Cash excellence never goes out of style, but it’s especially valuable when banks and other financers are showing some reluctance. In this article, we share both timely and timeless insights on why balance sheet discipline, particularly cash excellence, matters and how to bring it to your organization.

Releasing cash from the balance sheet

In the search for optionality, companies shift mindsets from their traditional P&L focus to a more balanced approach that also scrutinizes the balance sheet. Cash management is the result of thousands of decisions a day. Embarking on such a journey requires an organization-wide effort and strict discipline. Here, we focus on structural cash management improvements in working capital, capital expenditures, and other balance sheet opportunities.

Working capital

It’s well known that cash practices vary by sector, but our research reveals that industry is not destiny for cash management success. Rather, efficient working-capital management sets the leaders apart from the laggards within each industry (Exhibit 1). In fact, across many sectors, there are companies that achieve a negative cash conversion cycle (they get paid by customers faster than they pay their suppliers), providing a cost-free-financing option.2

Industry matters for working-capital performance, but within a given industry, execution matters even more.

Working-capital management—across accounts receivable, accounts payable, and inventory—is often ripe for cash opportunity. As companies grow, it’s common for them to ignore the balance sheet and prioritize the P&L, resulting in a greater investment in working capital than necessary.

Common approaches to improve working capital include optimized payment terms (for both customers and suppliers), standardized payment processes (which can also create operating efficiencies), and improved inventory target setting and process adherence. Companies may also use synthetic methods, such as supply chain financing, to reduce working-capital investments. Our colleagues have sketched out a wide range of ideas.3Moving from cash preservation to cash excellence for the next normal,” McKinsey, September 29, 2020.

Working-capital improvement doesn’t need to be a zero-sum game either. Many companies have weak invoicing processes that frustrate their customers and result in long cycles for receivables. Investing to improve them can reduce working-capital investments and delight customers. A data-driven process helps drive success, as seen in a couple of recent examples.

Over a period of several years, a chemical company experienced significant cash burn; it wound up in the bottom quartile of cash conversion performance compared with industry peers. To address this, the company implemented a factoring program that covered a third of its total accounts-receivable balance. The program focused on large customers with strong credit ratings. To get the most out of the program, the company quickly maximized the facility, mined its invoicing and collection processes to find areas for improvement, and established tighter management of overdue accounts and disputes, fostering a cash-focused mindset throughout the organization. This combined effort allowed the company to include most of its targeted customers in the factoring program and achieve a double-digit reduction in the days-sales-outstanding metric within one year, all at little cost.

A manufacturer of electrical components with industry-average cash performance and a growth-oriented mindset set a goal of reaching best-in-class working-capital performance. To accomplish this, the company launched a global program that included a dedicated workstream for inventory. It started by analyzing adherence to its current set of inventory parameters and targets, such as safety stocks, to identify reduction potential in raw materials and finished goods. The company then reviewed the target-setting methodology itself, as well as its forecasting accuracy, by using an advanced-analytics tool for inventory optimization. This data-driven approach, along with a cash control tower, helped reduce the company’s inventory levels by 20 percent and increase service levels by 25 percent across product categories.

Capital expenditures

Managing capital expenditures is another key lever to achieve cash excellence. Despite its importance, however, capex management often falls outside the core business, and executives may struggle to understand and predict the performance of individual projects and the overall portfolio.

Without a disciplined approach, companies can struggle during difficult operating environments like today’s. For example, they may be tempted to make abrupt cuts, but that could disrupt ongoing value-accretive projects and stifle innovation. In contrast, companies with a disciplined process often have more “cash headroom” and can actively think about future growth opportunities, leaving cash-poor companies at a disadvantage. Two essential components for managing capex are a robust process for allocating capital and a strong process to complete projects on time and on budget.

Organizations that shift to agile and transparent processes for capex can nimbly reallocate capital in times of heightened uncertainty, enabling them to outperform competitors that don’t. We are starting to see companies reallocating their capital more frequently, such as every one, three, or six months, rather than the traditional annual review. Approval processes are becoming more agile and iterative, with investment committees and working groups engaging in informal touchpoints to ensure that allocation decisions closely tie to the company’s overall strategic goals. Many more organizations could benefit from this approach but are still following the traditional methods.

Agile allocation of the capex budget also requires a common yardstick for ranking investment requests to secure the highest ROI. With these changes, companies can approach decisions on capital allocation with a level of flexibility and strategic alignment, optimizing their investments for maximum return and improved ROIC.

Additional balance sheet opportunities

Companies that schedule robust, regular reviews of their balance sheets can find other opportunities, such as converting underperforming assets and capital-consuming liabilities into accessible cash.

First, organizations can divest from underperforming long-term assets, usually found on the balance sheet under property, plants, and equipment. An analytical review of such assets can identify assets that should be sold or repurposed. Furthermore, companies can review cash trapped in foreign jurisdictions and find more productive uses for it. They can also review joint ventures to ensure timely distribution of associated cash dividends. Finally, companies can assess credit support requirements to determine whether they are still necessary and whether cash collateral is the most capital-efficient way to provide credit support. Alternatives, such as letters of credit and surety bonds, should be considered.

Over many years, an electric-power producer had posted cash collateral and other cash-intensive instruments to counterparties for a variety of obligations. It wanted to free up cash for distribution to its financial stakeholders. The company undertook a targeted process to identify which credit support was still required following a series of asset sales and regulatory changes. Then it determined if a less-cash-intensive instrument could be used. For example, it was able to replace cash collateral with a surety bond for a long-term environmental obligation. Overall, the company was able to reduce its cash collateral by approximately 50 percent in fewer than six months, translating this to available balance sheet cash that was distributed to financial stakeholders.

Sustaining the cash ‘unlock’ by getting the full organization on board

End-to-end cash management involves thousands of daily decisions made by individual employees at all levels, from CFOs managing the books to warehouse managers ordering spare parts to accounts-payable specialists making payments. A cash-focused culture across three dimensions—people, structure, and processes—is an important prerequisite for cash excellence.


CEOs and CFOs can prioritize the topic to establish a strong cash culture. Companies that excel at cash management communicate to employees the significance of cash in both resilience and value creation. They can prioritize metrics for capital efficiency, such as the cash conversion cycle, and pair them with capability-building programs to ensure that employees can make decisions based on both P&L and cash implications. An organization that balances cash management with earnings growth can dispel the misconception that cash management is solely the responsibility of finance and can encourage business and finance groups to share ownership of cash performance.


Top management and finance leadership should regularly discuss cash, making it an important agenda item in meetings, with specific accountabilities established. Leaders can determine a regular cadence and structure to discourage behaviors that focus only on improving quarterly or year-end figures. Leaders should set clear accountabilities for cash at the appropriate levels within the organization.


To promote cash management throughout an organization, companies can establish cash-related KPIs and set clear targets for each of them. Monitoring the KPIs with a dashboard refreshed each month should be the responsibility of the CFO. Assigning the appropriate KPIs to the corresponding level is essential. High-level KPIs (such as ROIC, working capital as a percentage of sales, and the cash conversion cycle) should be used at the top level, while operational KPIs (such as the percentage of overdue accounts, early and late payments, and adherence to inventory targets) should be used at the front line.

Organizations that prioritize data analytics can establish data infrastructure and organizational structure that facilitate the easy consolidation of information. To unlock the true potential of data, they can adopt a forward-looking mindset and use data and analytics to identify potential issues and make informed decisions (Exhibit 2). The use of digital tools, such as real-time financial-reporting systems for cash KPIs and automated systems to streamline repetitive tasks in back-office processes (for example, order to cash and procure to pay), can greatly improve system efficiency.

A detailed dashboard with triggers for action can track the success of the cash management program.

Organizations should regularly perform a review of their balance sheets for cash-releasing opportunities. To sustain the change over time, they can instill an organization-wide cash mindset articulated around people, structure, and processes. The companies that do so will be more resilient in times of crisis and able to allocate capital to growth opportunities, while cash-poor companies will be left behind.

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