Using excel in finance: the love/hate relationship

Smart working capital management is important for any business— it creates financial stability, supports operational productivity, helps avoid emergencies, and enables growth. In essence, managing working capital  is about balancing your short-term assets and liabilities for a stable and resilient business. You master working capital management through a flexible, strategic policy.  

What is a working capital management policy and why does it matter?

At its core, a working capital management policy governs how a business manages its short-term assets (cash, inventory, receivables) and short-term liabilities (accounts payable, debt). A thoughtful policy ensures a company always has the liquidity to meet its day-to-day operational expenses while balancing profitability and risk.

Many businesses typically create a working capital management strategy around the following factors:

1. Industry needs: Some industries, like retail and manufacturing, require large inventories, while others, like consulting firms, operate with minimal working capital assets.
2. Growth objectives: A rapidly expanding business may prioritize reinvestment and lean operations, while a mature firm might focus on maintaining reserves for stability.
3. Risk appetite: Companies with lower tolerance for financial risk may prefer conservative strategies, but those wanting to rapidly expand might use different tactics.

Additional factors can include:

• Sales volume and the possibility of accounts receivables
• Nature of credit policy
• Degree of seasonality 
• Production policy of the company and the rate of production maintained
• Competitive conditions 
• Dividend policy 

Your policy should align with  your company’s strategic goals, and provide a framework for making decisions  according to the economic conditions. It’s also important to consider your industry when crafting a policy. 

Effective working capital management ensures a steady and reliable cash flow, allowing organizations to maintain liquidity for operational needs and unforeseen expenses.

Industry-specific differences in working capital management

Working capital needs vary dramatically across industries. Understanding the nuances will help inform the appropriate strategy. Here’s a quick overview of what this looks like.

Inventory-intensive industries

Sectors like manufacturing and retail require significant investments in inventory. For instance, a retail chain must manage seasonal inventory fluctuations to avoid overstocks or shortages. Companies like Zara manage working capital by using short lead times and adjusting stock based on consumer trends.

Service-oriented businesses

On the other hand, service-based industries, such as consulting or software development, often operate with minimal inventory and focus on receivables management. These companies rely more heavily on cash flow forecasting and timely client payments to ensure liquidity.

Example case study 

Take Apple Inc., which operates in technology manufacturing. By maintaining tight control over inventory and negotiating favorable terms with suppliers, Apple achieves an enviable cash conversion cycle. This approach frees up capital for innovation and investment. After factoring in the industry, you can narrow down a strategic direction for working capital management. 

Three approaches to working capital management

Every business falls into one of three broad categories for working capital management strategies: an aggressive approach, conservative approach, and moderate approach. Each serves different business objectives.

1. Aggressive approach

An aggressive working capital management approach minimizes investment in current assets—like cash reserves and inventory—to maximize profitability.

Key Features:

1. Focuses more on profitability than liquidity and prioritizes higher returns by minimizing the amount of capital tied up in current assets. This strategy may expose the business to liquidity risks during unexpected financial demands or market fluctuations.
2. Relies heavily on short-term financing. Businesses often fund operations and investments using short-term credit such as trade credit or short-term loans. While this can reduce financing costs in the short term, it increases the risk of solvency issues if liabilities aren’t met. 
3. Maintains lean inventory and minimal cash reserves. By keeping inventory levels low and holding only essential cash, the aggressive approach reduces costs associated with carrying excess assets. However, this can result in challenges when meeting sudden spikes in demand or managing unforeseen expenses. 

Pros:

• Higher returns due to a reduced need for carrying costs, minimizing inventory and cash reserves. Resources can be reinvested into high-growth opportunities such as research and development, market expansion, or employee training. 

Cons:

• Increased risk of liquidity crises in economic downturns means the organization may find it challenging to cover operational expenses and meet short-term obligations. 
• Dependency on short-term financing exposes the business to higher costs and volatility,disrupting funding and creating financial instability. 

Example:

Tech startups often adopt this approach. Their focus on scaling rapidly with tight operational budgets means holding minimal cash reserves while aiming for high profitability.

2. Conservative approach

A conservative working capital management approach prioritizes financial security by maintaining liquid asset reserves and offering extended credit terms.

Key Features:

1. High investment in cash, receivables, and inventory provides sufficient liquidity to meet short-term obligations and unexpected expenses. This approach prioritizes stability and provides a buffer against market fluctuations, though it may result in lower returns due to idle assets. Companies adopting this strategy often accept reduced operational efficiency in exchange for enhanced financial security.
2. Lengthier accounts payable cycles allow businesses to retain cash for a longer period, improving short-term liquidity and operational flexibility. This can reduce strain on cash flow and provide more time to allocate resources strategically. However, it may impact supplier relationships if vendors find delayed payments risky or unfavorable.

Pros:

• Decreased risks of liquidity shortfalls as businesses retain cash on hand longer, enabling them to meet unexpected expenses or operational demands without requiring external financing. 
• Higher capacity to weather financial downturns by preserving internal resources that can be utilized to maintain operations or adjust to market shifts. 

Cons: 

• Lower returns due to inefficient use of assets. When businesses hold onto excess cash or other underutilized resources, they can’t seize opportunities to generate higher profits through strategic reinvestment or expansion. 
• Growth may be slower due to conservative reinvestment strategies. While this approach prioritizes stability, it can hinder long-term scalability and profitability.

Example:

Large, mature corporations like pharmaceutical companies often implement this approach, ensuring steady performance even in volatile markets.

3. Moderate approach

The moderate or balanced approach blends aggressive and conservative strategies to attain liquidity and profitability.

Key Features:

• Balances current assets and liabilities to maintain operational efficiency while ensuring financial stability. By carefully managing the ratio of assets to liabilities, this approach minimizes cash flow and over-leveraging risks. It is particularly useful for businesses seeking sustainable growth in dynamic markets.
• Avoids extremes in inventory or receivables management, ensuring neither excess inventory nor delayed receivables compromise the business. This method prevents unnecessary holding costs while promoting timely cash inflows, fostering a stable financial cycle that supports consistent operations.

Pros:

• Maintains steady cash flow without much risk exposure. The moderate approach allows businesses to meet their obligations promptly while avoiding unnecessary borrowing or liquidity issues. 
• Adequately supports growth and operational stability. This balance between controlled risk and sustainable growth equips businesses to scale in fluctuating markets. 

Cons:

• May not deliver maximum returns in the short term compared to aggressive strategies. 

Example:

Well-established retail giants such as Walmart use this strategy to maintain liquidity while continuing to reinvest in growth opportunities.

Choosing the right approach for your business

When deciding on a working capital management approach, you may want to consider several factors:

• Business size and growth stage:

Startups often benefit from aggressive strategies because they require more flexibility and quick access to capital to fuel rapid growth and innovation. On the other hand, mid-sized businesses and corporations tend to prefer moderate or conservative approaches that provide stability and sustain long-term operations. Each strategy must align with the business's specific financial needs and growth objectives.

• Economic conditions:

Volatile markets may necessitate a shift to conservative financial policies, as protecting liquidity becomes crucial during periods of uncertainty and economic instability. These measures help businesses mitigate risks and maintain operational continuity. Conversely, in steady or growing markets, businesses might adopt a more aggressive financial approach, seizing opportunities for expansion and higher returns.

• Industry norms:

Companies operating in competitive, inventory-heavy industries often adopt strategies designed to prioritize flexibility in their operations. This flexibility allows them to adapt swiftly to changing market conditions, such as shifts in consumer demand or supply chain disruptions. By focusing on adaptability, these businesses can maintain a competitive edge and ensure smoother operational workflows.

• Management’s risk appetite:

The level of risk that management is willing to accept directly influences the company’s strategic decisions and operational priorities. A higher risk appetite often leads to aggressive growth strategies, innovative projects, or investments in untested markets. Conversely, a more conservative risk approach typically emphasizes stability, cost control, and incremental progress to safeguard resources and minimize exposure to potential losses.

Over time, companies can also evolve their strategies to match their growth trajectory. A small retail start-up might shift from aggressive to moderate as it scales while keeping liquidity stable.‍

Align your working capital strategy with your business goals

Effective working capital management is not one-size-fits-all. Each business must tailor its approach to align with industry requirements, growth plans, and risk tolerance. The right strategy enables financial stability, supports operational efficiency, and positions the company for long-term success.

At the end of the day, the key takeaway is this: Evaluate, optimize, and evolve your working capital strategy continuously to keep pace with your business objectives and market conditions.

Panax helps companies to optimize liquidity and reduce cash risks

Panax provides an AI-driven cash management platform that helps lean finance and treasury teams with complex treasury needs. Within Panax, finance professionals get full visibility and control over everywhere their cash is, and the platform helps surface insights for optimizing liquidity, as well as alerts and policies to reduce cash risks. The Panax platform provides the flexibility to support your company’s working capital strategy, and to change it easily, based on your business needs. ‍

Get in contact today to see how Panax can transform your cash management.

Working capital is the difference between a company’s current assets (e.g., cash, inventory, accounts receivable) and current liabilities (e.g., accounts payable, short-term loans).

The formula is simple:

Working Capital = Current Assets – Current Liabilities

Working capital management is the process of managing these resources to meet short-term obligations and remain operational.

Simple Example:

Imagine a small retail business. Their inventory (current asset) is worth $50,000, while their accounts payable (current liability) sits at $30,000. Their working capital is $20,000. If they poorly manage accounts payable or overstock their inventory, they risk liquidity issues that could jeopardize daily operations.

Why businesses need to manage working capital effectively

Proper working capital management ensures financial stability. It’s a balancing act—too much working capital may suggest inefficiency, while too little can lead to liquidity crises. Effective management provides the flexibility to meet immediate financial obligations and invest in growth opportunities.

The link to cash flow optimization

Working capital management is inextricably tied to cash flow. By optimizing accounts receivable, accounts payable, and inventory, businesses can accelerate their cash conversion cycle (CCC)—the time it takes to convert investments in inventory into cash received from customers. Essentially, a shorter CCC means smoother cash flow.

Impact on profitability and liquidity

• Profitability improves as funds tied up in working capital can be reinvested into high-ROI opportunities.
• Liquidity reduces the risk of insolvency, ensuring the company can cover its short-term liabilities.

How it works

1. Monitor assets and liabilities: track cash, accounts receivable, inventory, and accounts payable. 
2. Analyze ratios: use ratio analysis to measure working capital management effectiveness.
3.  Make decisions: use the information to make decisions about short-term spending and debt. 
4. Improve processes: use software to automate processes like invoicing and payments. 

Types of working capital

To create financial strategies tailored to your business, it’s critical to understand the different forms of working capital:

1. Permanent working capital 

Permanent working capital is funds that are consistently required to support basic operational needs (e.g., maintaining inventory). These funds remain constant irrespective of fluctuations in business activity levels and are vital for sustaining long-term operations. Properly managing permanent working capital ensures the business operates smoothly even during periods of economic uncertainty.

2. Regular working capital 

These are funds needed to cover routine operational expenses in running a business. Regular working capital is critical to maintaining liquidity and meeting short-term obligations without disruption.

3. Reserve working capital 

Reserve working capital is funds set aside to address unexpected expenses or financial contingencies due to unforeseen circumstances. Maintaining adequate reserve working capital safeguards the business against potential disruptions and assures operational stability under challenging conditions.

4. Fluctuating working capital 

Fluctuating working capital requires careful planning and monitoring to effectively allocate resources during peak and off-peak periods. Proactively managing these variations helps prevent cash flow issues and supports business operations.

5. Gross working capital 

Gross working capital refers to the total current assets available within a business, including cash, accounts receivable, inventory, and other liquid assets. By effectively managing gross working capital, the organization has sufficient resources to meet short-term obligations while enabling smooth operational processes.

6. Net working capital 

Net working capital is the difference between a company's current assets and current liabilities, which indicates financial health. Maintaining positive net working capital is essential for meeting short-term liabilities and supporting day-to-day operations.

5 Key components of working capital

‍To streamline working capital management, businesses usually focus on the following  critical elements:

1. Current assets

Current assets encompass resources a company can convert into cash within a short period, typically a year. These assets include i) cash and cash equivalents ii) accounts receivable, inventory, and iii) short-term investments. Managing current assets is crucial for maintaining liquidity while covering immediate financial needs. These resources allow businesses to manage operations seamlessly, respond to market demands, and support growth opportunities. Proper oversight and optimization of current assets directly contribute to a strong financial position. 

2. Current liabilities

Current liabilities include i) accounts payable and ii) short-term loans, which represent the company's immediate financial responsibilities. Accounts payable refers to amounts owed to suppliers or vendors for goods and services already received, while short-term loans typically involve borrowed funds that must be repaid within a year. Correctly managing these liabilities is essential to maintaining the organization's financial health and smooth daily operations.

3. Net working capital formula

Net Working Capital = Current Assets - Current Liabilities

‍Net working capital is a critical measure of a company's short-term financial health, operational efficiency, and liquidity. A positive net working capital means that the company has enough current assets to cover its current liabilities, meet financial obligations, and invest in growth opportunities. On the other hand, a negative figure could mean potential liquidity issues and necessitate immediate attention to protect the business’s stability.

What should be excluded from working capital?

Items that aren’t part of a company’s short-term assets or liabilities are not part of working capital and include: fixed assets (e.g. real estate and equipment that can’t be converted into cash within a year, long-term debt and lease obligations that go beyond a year, retained earnings or common stock, and patents and trademarks).

‍
Benefits of effective working capital management

Why should organizations prioritize working capital management? Read on for the key benefits: 

Improved cash flow & liquidity 

Effective working capital management ensures a steady and reliable cash flow, allowing organizations to maintain liquidity for operational needs and unforeseen expenses. By optimizing receivables, payables, and inventory levels, companies can reduce financial strain and avoid costly short-term borrowing. This proactive approach not only supports day-to-day operations but also provides flexibility to take advantage of strategic investment opportunities that power long-term growth and stability.

Better risk management 

Effective risk management is critical for mitigating financial uncertainties and safeguarding organizational stability. By analyzing potential threats and implementing robust contingency plans, companies can minimize the impact of adverse events on their operations. Proactive identification and evaluation of risks allow businesses to allocate resources strategically, reducing exposure to volatility.

This structured approach enhances decision-making processes and promotes resilience, ensuring sustained performance even in challenging market conditions.

Enhanced operational efficiency 

Streamlining processes, optimizing resource utilization, and reducing redundancies across the organization enhance your operations, improve productivity, and create better outcomes.Through working capital management, your business can create clear workflows and continuously monitor performance to align operations with strategic goals. This not only drives cost-effectiveness but also allows the company to quickly adapt to market demands for long-term success.

Stronger supplier & customer relationships 

Maintaining liquidity to meet its short-term obligations via working capital management means you’re making timely payments and fostering trust with suppliers. This reliability strengthens partnerships, leading to better negotiation terms and consistent supply chains. Similarly, optimized working capital enables businesses to offer favorable payment terms to customers, enhancing satisfaction and loyalty.

By balancing cash flow, businesses can create mutually beneficial relationships that support long-term growth and collaboration.

Challenges in managing working capital

While the benefits are clear, managing working capital is not without challenges:

1. Cash flow constraints 

Insufficient liquidity can lead to missed growth opportunities or delayed payments. Businesses often struggle to balance incoming and outgoing cash, particularly when dealing with fluctuating sales cycles or unexpected expenses. Additionally, relying on credit or slow-paying customers can exacerbate these constraints, straining operational efficiency.

2. Over-reliance on credit 

Excessive dependence on short-term financing can lead to high-interest costs. This can reduce financial flexibility and leave your businesses vulnerable during low revenue periods. Furthermore, it can create a cycle of dependency that hinders long-term growth and hampers the ability to invest in strategic initiatives.

3. Inventory management issues 

Poor inventory management disrupts cash flow, as excess inventory leads to increased holding costs, while insufficient stock can damage customer relationships and diminish brand reputation. Balancing inventory levels is critical to ensure liquidity and maintain operational stability. 

4. Accounts receivable delays 

Late payments from customers hinder cash flow and operational agility. These delays reduce the funds needed for day-to-day operations and strategic investments. Prolonged payment cycles may also increase reliance on external financing, raising borrowing costs and financial risk.‍

Strategies for working capital management

‍To overcome these challenges, CFOs and treasurers can adopt some of the following strategies:

1. Cash flow forecasting & budgeting 

Anticipate future cash needs to avoid shortfalls or surpluses. Tools like cash flow software can streamline projections. Regularly updating cash flow forecasts to align with changing market conditions and organizational priorities, for better decision-making. 

1. Inventory control techniques 

Implement just-in-time (JIT) or ABC analysis to maintain optimal inventory levels. These methods minimize holding costs and reduce the risk of obsolescence while ensuring that stock levels meet demand. Regular inventory audits and leveraging software solutions can further enhance efficiency and accuracy in inventory management.

3. Streamlining accounts receivable & payable 

Encouraging faster customer payments by offering early payment discounts, which improve cash flow and reduce outstanding receivables. Additionally, negotiating extended payment terms with suppliers gives you more financial flexibility and improved management of accounts payable.

4. Leverage financial tools & technology 

Use automated solutions like supply chain finance platforms and electronic invoicing to improve efficiency. These tools streamline payment processes, reduce errors, and provide real-time insights into cash flow, fostering more informed decision-making.

Differences between related concepts

‍Lastly, it’s crucial to disentangle working capital management from related concepts:

Working capital vs. cash management 

Working capital compares current assets to current liabilities to understand whether the finance team can pay bills and other short-term liabilities. Cash flow measures the cash inflows and cash outflows, as shown in the cash flow statement. 

Working capital vs. capital budgeting 

Capital budgeting focuses on long-term strategic investments, while working capital management is concerned with the short-term, operational aspects of managing a company's current assets and liabilities.

Take control of your working capital today

Working capital management isn’t just a financial principle—it’s the backbone of operational efficiency and business growth. For CFOs, VPs of Finance, Controllers, and Treasurers, understanding and implementing these strategies is vital for maintaining liquidity, optimizing cash flow, and securing a competitive edge.

Find gaps in your working capital strategy? Prioritize stronger relationships with suppliers, streamline receivables, and harness the power of automation to elevate your game. A balanced working capital approach today can fuel unprecedented growth tomorrow.

To get more insight into the state of AI and automation in cash flow management in 2025, we commissioned a survey of 200 senior finance professionals. Its purpose is to shed light on their current methods, challenges and priorities.

This report was administered online by Global Surveyz Research, an independent global research firm. The survey is based on responses from CFOs, VPs Finance, Directors/Heads of Finance, Controllers, and Treasurers across a mix of industries including tech, E-commerce, real estate, asset- based companies, hospitality, and manufacturing.

Survey participants hailed from companies with an ARR of $50M+ and treasury departments that include 4+ people (25%), 1-3 people (25%), or no treasurers (50%), in the US, UK, DE/FR, and MEA.

What the survey found: Increasing pressure on finance teams to improve efficiency, but continued caution about adopting AI solutions 

The survey revealed that 33% of respondents faced internal operational risks, such as fraud or system breakdowns, over the past year. Additionally, 32% highlighted regulatory constraints, while 27% cited debt obligations with near-term maturities as significant challenges. This convergence of internal and external pressures is compelling organizations to rethink their approach to cash flow management.

To stay resilient, finance teams are focusing on achieving real-time visibility and implementing proactive measures to mitigate risks before they escalate.

According to the survey, areas such as audit and compliance, expense management, transaction categorization, and cash flow forecasting were rated equally as high priorities for AI implementation. These technologies are streamlining traditionally labor-intensive processes, enhancing accuracy, and freeing up valuable resources.

Larger enterprises, in particular, find AI indispensable, as its ability to process vast transaction volumes reduces the burden on finance teams and allows them to focus on strategic decision-making.

The adoption of AI is not without its challenges. Concerns around cost, regulatory compliance, and data reliability remain top of mind for many finance teams. However, the benefits of automation—from error reduction to improved forecasting capabilities—are undeniable. By investing in scalable, AI-driven solutions and prioritizing data quality, companies can future-proof their operations and ensure they are prepared to navigate an increasingly complex financial landscape.

As the 2025 survey highlights, embracing innovation is no longer optional for finance teams. By leveraging AI to overcome liquidity challenges and optimize operations, organizations can transform their cash flow management processes and secure a competitive edge in an era of rapid change. 

Download the full survey report here.