Cash is king, as the saying goes. Yet CFOs pour enormous energy into managing EBITDA, the language of investors, lenders, and boards, while paying less attention to how much of these earnings ultimately becomes cash. Two areas in particular can absorb more cash than necessary.
Many companies have substantial amounts of cash unnecessarily tied up in working capital. For example, McKinsey’s analysis of 250 large Nordic companies found that those in the bottom quartile of cash conversion could free roughly €100 billion by matching their industry median—and about €220 billion by reaching top-quartile performance. The process can be swift: Companies can free tens of millions to hundreds of millions of dollars in as little as 60 to 90 days by managing working capital more rigorously.
Companies also tend to commit more cash than necessary to fixed assets. Consider a company that earns a 20 percent return on capital and expects its business to grow by 5 percent a year. To support that growth while maintaining the same return on capital, it would need to reinvest about 25 percent of its post-tax operating profit.1 If the company invests more than that, the additional investment needs to produce faster growth or similarly attractive returns.
Addressing these two areas, however, is not as simple as the CFO setting cash targets. Many of the decisions that determine how much working capital a company needs happen beyond the finance function’s immediate reach. CFOs have to discover where excess working capital is building up, determine what needs to change, and get buy-in from leaders across the company to make these changes. Fixed-asset investment presents a different challenge: CFOs need to control unnecessary spending without depriving businesses of the investment they need to grow. The right level of investment varies by business and its role in the company’s strategy.
CFOs’ focus on cash conversion varies widely by country, depending on access to capital markets and the cost of capital. In some economies, it may not rise to the top of a CFO’s agenda, though of course when there is a liquidity crunch, it suddenly becomes crucial. Overall, improving cash conversion can generate a lot of incremental liquidity without requiring a major transformation, giving companies more room to invest in growth, pay down debt, or distribute to shareholders via dividends.
Why managing cash conversion is harder than it looks
CFOs who aspire to improve their companies’ cash conversion face two major challenges. First, finance often sees the consequences of decisions affecting working capital only after those decisions have been made elsewhere in the business. Finance may track overdue receivables, early payments to suppliers, or excess inventory, for example, but only after sales, procurement, and supply chain teams have made the decisions that produced those results. Quarter-end reporting may therefore reveal cash that has been unnecessarily committed without giving CFOs an opportunity to prevent it from happening.
The second and greater challenge is determining how much cash a business should commit in the first place. There is no single optimal level of cash conversion. Faster-growing companies generally need more working capital and fixed-asset investment, while appropriate payment terms and inventory levels vary by industry and geography. Investment needs can also change over time, even within an industry, as software companies’ recent investments in data centers illustrate.
For the same reason, a high ratio of free cash flow to EBITDA is not necessarily better. It could indicate efficient use of cash, but it could also mean a company is underinvesting in growth. Conversely, a lower ratio may be appropriate for a fast-growing business that has attractive opportunities to invest. A single target across a diversified company can therefore do damage. For example, a diversified industrial company set the same aggressive free-cash-flow target for all its businesses and ended up depriving some of its strongest growth businesses of needed investment.
The goal is not to maximize cash conversion but to determine the right level for each business. CFOs can set targets that reflect each business’s growth prospects and strategic role.
Cash conversion improvements pay off at different speeds
Improving cash conversion can make a significant difference. Full-potential diagnostics routinely surface onetime cash worth 10 to 30 percent of a company’s working capital base—a meaningful sum that doesn’t require any external borrowing.
The speed at which companies can capture that cash, however, depends on where it is tied up (table). Changes to receivables and payables can produce results within a quarter. Inventory improvements generally take longer because companies need to understand the underlying problems and make changes without disrupting product availability. Capital expenditure improvements take longest because they need to align with multiyear investment plans and long-term strategy. These different timelines make sequencing important: CFOs need to decide which sources of cash to pursue first and which longer-term efforts to begin in parallel.
Companies can release 10 to 30 percent of their working capital base, but the timing varies by source.
| Area | What ties up cash | Timeline for results |
| Receivables | Inconsistent customer payment terms, slow invoicing, weak collections | Weeks to months |
| Payables | Inconsistent or unfavorable supplier payment terms, unnecessarily early payments | |
| Inventory | Excess or slow-moving inventory, production that doesn’t keep pace with changes in demand | Months to 1.5 years |
| Capital expenditures | Overly costly project designs, buying new assets when existing ones could be reused, insufficient scrutiny of project costs | Years |
Four ways CFOs can improve cash conversion across the business
CFOs can improve cash conversion by making it a consideration in decisions across the business and giving people the tools and incentives to manage it carefully. This requires putting the right people in charge, using detailed data to identify problems, making disciplined capital-investment decisions, and helping employees understand how their everyday choices affect cash.
Designate a working capital coordinator but keep capital investment with senior leaders
Without a single person responsible for coordinating working capital efforts across the company, cash conversion can remain everyone’s concern but no one’s job. To solve this problem, CFOs can designate a coordinator to work across sales, procurement, supply chain, manufacturing, and finance, helping those teams understand how their decisions affect working capital and making sure they are working toward the company’s targets. The coordinator should be someone with strong financial and analytical acumen who understands the business’s operations.
On the other hand, decisions about capital investment require trade-offs among businesses and need to reflect the company’s broader strategy. Responsibility for those decisions should therefore remain with the CFO and CEO.
A cash center of excellence—a cross-functional team that coordinates working capital decisions across areas such as sales, procurement, and supply chain—can also help companies manage cash across the business rather than function by function. For example, one company that had lost focus on questions of cash created such a center during an enterprise-wide transformation. It improved its cash conversion cycle by roughly 13 percent in the first year.
Use data to find trapped working capital
Companies can use transaction-, invoice-, and SKU-level data to identify where cash is getting stuck. AI tools available today can easily identify mismatches between contracted and applied payment terms, predict which invoices are likely to be paid late, and improve demand forecasts to reduce excess inventory and release cash.
At one project-based business, for example, an invoice-level analysis comparing contractual payment terms with actual delivery, invoicing, and collection dates revealed that the problem was not customer payment terms but the delay between completing work and sending an invoice. Shortening that delay reduced the time it took to collect payment from key accounts, and other fixes to internal processes further improved receivables.
Another company used granular invoice data to identify more than 150 different customer payment terms and opportunities to standardize them. Simplifying those terms helped it collect payments more quickly, reducing outstanding receivables by about 10 percent, with more than half of the reduction occurring within six months. A third company cut its overdue balances in half within a year by automating collection notices and reviewing outstanding accounts weekly. Automated alerts, streamlined invoicing, and systems that provide real-time visibility of unbilled work can help companies collect cash sooner.
To be sure, it can be a challenge for CFOs to reduce unnecessary working capital without creating problems elsewhere in the business. Payment terms that are too aggressive can strain relationships with customers or suppliers, while cutting inventory too far can lead to missed sales. After all, an empty shelf can cost more than the cash it frees. To help strike the right balance, CFOs can benchmark receivables, payables, and inventory against appropriate industry and regional norms, use these benchmarks to set reasonable targets, and hold business leaders accountable for meeting them.
Optimize capital spending rather than simply cutting it
When markets tighten, capital budgets are often the first to be slashed, but blunt cuts rarely create value. Optimizing capital spending is not necessarily about spending less; it’s about investing the right amount, in the right projects, and at the right time to support near-term needs and long-term strategy.
To get more value from each dollar invested, companies can use a structured approach to capital expenditure management. This includes comparing proposed project costs with similar projects, using a cross-functional review board to challenge whether the proposed scope is necessary, designing projects around the value they need to deliver, and looking for opportunities to reuse existing assets. Cash released from working capital can then be directed toward the capital investments with the greatest potential to create value.
For example, one capital-intensive company facing a liquidity squeeze reduced capital expenditure by 10 to 20 percent in three months without canceling projects. It used challenge boards to scrutinize proposed investments, designed projects around the value they needed to deliver, and reused existing equipment where possible. The company also used should-cost models to estimate suppliers’ costs and margins and negotiate better prices, while challenging specifications to avoid paying for equipment that exceeded the project’s needs. These efforts reduced the cost of new projects by up to 30 percent.
Build cash management into how the company operates
CFOs can use incentives to encourage people across the business to consider cash in their decisions. Some companies tie a portion of compensation to cash performance, while others reward cash collected rather than sales booked. Some companies put an internal “price” on capital—for example, 1 percent a month—to make the cost of using it more visible. This means putting an explicit internal cost on decisions that tie up cash, such as giving customers longer to pay or paying suppliers sooner, to discourage employees from making these choices.
Incentives need to be designed carefully. Too much emphasis on cash can encourage underinvestment in growth or behavior toward customers and suppliers that harms the underlying business. Companies can balance cash measures with growth and returns so that improving cash conversion supports the company’s relationships and goals.
Employees, including those below the profit line, need to understand how their everyday decisions affect the big picture. AI can make the cash impact of these decisions more visible by analyzing large volumes of transaction-level data to pinpoint where cash is getting tied up. CFOs can also set working capital targets that adjust as the business grows, rather than using a fixed dollar amount, using this formula:
If a business targets working capital at [x] percent of revenue, the increase in working capital should not exceed revenue × revenue growth rate × [x].
Managing EBITDA well is essential, but CFOs also have good reason to pay close attention to how much of those earnings ultimately becomes cash. Improving cash conversion may not always be at the top of the agenda, but it can yield significant benefits without requiring a major transformation.
CFOs can start by conducting a focused diagnostic to identify where the largest opportunities lie and by generally giving cash conversion greater prominence alongside growth and margins. They can pursue near-term improvements while beginning the longer-term work needed to manage working capital and capital investment more effectively across the business.
The payoff for focusing on this issue can be substantial. Better cash conversion can give companies more money to invest in growth, to return to shareholders, or to hold in reserve for periods of uncertainty.
