Managing Cash via Working Capital Optimization

Here is a trick question for you: Which is more important – Profitability or positive Cash Flow?

For those of you thinking, “Wait, how are they different in the first place?”…just keep reading.

As you think about that question, consider that 82% of entrepreneurial businesses fail because of poor cash management!

I would never suggest that profitability concerns should be secondary to cash concerns, but understand that profit doesn’t pay bills, cash does.

Remember that Profit does not necessarily equal Cash Flow.  They can be, and frequently are, significantly different, the main difference usually coming from working capital.

Working Capital

 Working capital can simply be defined as the cash you have put to work in your business.  What is the cash “working on”?  Good question.  Typically there are three areas:

  1. Granting your customers short-term loans (aka Accounts Receivable)
  2. Paying for all that stuff in your warehouse (Inventory)
  3. Short-term loans your vendors have given you (Accounts Payable).

Optimizing your working capital doesn’t have to be complicated.  How well you have it optimized is always a function of how well you understand how cash moves through your business in the first place.

Cash Management

By asking two questions I’ve found I can get an immediate and reliable representation of how good a company’s cash management practices are.  I ask:

  1. “What is your cash balance right now and how much do you need in the next 3 months?”…and if you don’t know this, either figure it out or go to and place your order now, don’t laugh…it’s a real site.
  1. “How many days faster or slower do you pay your vendors than you collect from your customers?”

Their answers reveal whether the company understands cash management blocking and tackling.  Great cash management principles and basic refreshers can be found at, and, ranked in my perceived order of simple to sophisticated.

Once you’ve got the concepts, we always recommend doing two things:  One, prepare a 13-week forecast, and two, relentlessly attack working capital.

Here are some thoughts on optimizing working capital.

Accounts Receivable

It is your money.  Go get it.  There are myriad strategies (see above links), but never NEVER assume all your clients will simply pay you on time.  Be proactive…reach out.


Look out into the warehouse.  If you see any inventory…there is probably an opportunity for improvement.   Typically you need technology to help optimize your inventory levels.  QuickBooks or similar are adequate in some cases, but often you need something more robust like Fishbowl.  You don’t want to enter it twice.  Get Fishbowl and integrate them seamlessly.

Accounts Payable

Ensure you’re paying your bills appropriately.  Ask your vendors for terms.

Study the concepts, prepare and execute your plan.

Categories: Cash Management