How to Build a Working Capital Optimisation Roadmap

Improving working capital is rarely as simple as extending payment terms, accelerating collections or reducing inventory.

Each of these actions can influence liquidity, but the underlying causes of poor working-capital performance often sit across multiple functions, systems and commercial processes. A delayed customer payment may begin with an invoicing error. An apparently high level of supplier spend may include inconsistent payment terms. Excess inventory may reflect forecasting, procurement or production decisions made months earlier.

A working capital improvement roadmap provides a structured way to identify these constraints, quantify the available opportunity and prioritise initiatives that can deliver sustainable results.

This guide outlines seven practical steps for developing that roadmap.

Why a structured roadmap matters

Working capital is commonly assessed through four measures:

• Days sales outstanding (DSO): the average number of days required to collect trade receivables.
• Days payable outstanding (DPO): the average number of days an organisation takes to pay trade creditors.
• Days inventory outstanding (DIO): the average number of days inventory remains within the business before being sold or used.
• Cash conversion cycle (CCC): DIO plus DSO minus DPO.

These measures provide useful starting points, but they do not explain why cash is being tied up.

Customer disputes may cause a high DSO, incorrect invoices, delayed billing, weak collections or contract terms. A low DPO may reflect short negotiated terms, inconsistent payment scheduling or unplanned early payments. High inventory days could result from inaccurate forecasts, slow-moving stock, long lead times or minimum-order requirements.

The roadmap must therefore connect financial measures to the operational processes that underlie them.

Step 1: Establish the working capital baseline

Begin by calculating the organisation’s current DSO, DPO, DIO and cash conversion cycle.

Where possible, analyse the measures over several reporting periods rather than relying on a single month-end position. This helps identify seasonality, unusual transactions and changes in customer or supplier behaviour.

• The initial analysis should include:
• Trade receivables by customer, region, currency and age
• Trade payables by supplier, payment term and due date
• Inventory by category, location, age and turnover
• Contractual payment terms
• Actual payment and collection performance
• Disputed, overdue and blocked transactions
• Existing receivables or supplier-finance arrangements
• Relevant sector or peer benchmarks

Benchmarking can provide useful context, but comparisons should account for differences in sector, business model, geography, customer mix and seasonality. A DSO or DIO figure that appears high in isolation is not necessarily evidence of poor performance.

The objective is to establish a reliable baseline against which future improvements can be measured.

Step 2: Identify the operational causes

Once the baseline has been established, investigate the processes that create the headline figures.

Accounts receivable

Review the complete order-to-cash process, including:

• Contract and payment terms
• Customer credit controls
• Billing frequency
• Invoice accuracy
• Proof-of-delivery requirements
• Customer disputes and deductions
• Collection activity
• Cash application
• Credit notes and write-offs

Receivables ageing does not always result from customers simply refusing to pay. Internal delays—such as late invoicing, missing documentation or unresolved disputes—can also postpone collection.

Receivables financing can provide earlier access to cash, but it should be distinguished from reducing the time customers take to settle their obligations. The two approaches address different objectives.

Accounts payable

Review the procure-to-pay process, including:

• Contracted supplier terms
• Invoice receipt and approval times
• Payment scheduling
• Early and late payments
• Duplicate or disputed invoices
• Supplier segmentation
• Payment methods
• Available early-payment or supplier-finance options

Unplanned early payments can unnecessarily reduce DPO. However, improving DPO should not mean paying suppliers after the agreed due date.

Any improvement should arise from negotiated commercial terms, consistent approval processes and controlled payment scheduling. Supplier treatment, contractual obligations and applicable payment-practices requirements must remain central to the decision.

Inventory

Review:

• Demand forecasting
• Safety-stock policies
• Minimum-order quantities
• Production schedules
• Supplier lead times
• Slow-moving and obsolete stock
• Returns
• Stock held across different locations
• Inventory ownership and consignment arrangements

Reducing inventory may release cash, but the organisation must also consider customer-service levels, operational resilience and supply-chain risk. Clearing slow-moving stock may require discounting, impairment or disposal and may not recover its full accounting value.

Step 3: Quantify the potential opportunity

Translate potential improvements into cash terms.

This allows treasury and finance teams to compare initiatives and communicate the opportunity to senior decision-makers.

For example, using annual revenue as a simplified proxy for credit sales, a five-day DSO reduction on £200 million would represent approximately:

£200 million × 5 ÷ 365 = £2.74 million

This indicates approximately £2.7 million of potential cash-flow improvement at the current activity level.

The actual calculation should use relevant credit sales and average receivables data wherever available.

Similarly, using annual cost of goods sold as a proxy for credit purchases, a ten-day DPO increase on £120 million would represent approximately:

£120 million × 10 ÷ 365 = £3.29 million

This would indicate approximately £3.3 million of additional cash retained at a point in time.

These figures should not automatically be described as permanent working capital. The benefit remains available only while the improved position is maintained. Changes in sales, purchasing, seasonality, supplier terms or payment behaviour can increase or reverse the effect.

The business case should therefore distinguish between:

• Cash released at the current activity level
• Recurring cost savings
• Financing proceeds
• Avoided financing costs
• One-off implementation costs
• Ongoing platform, funder and operational costs

Buyer liquidity, supplier liquidity and funder exposure should also be measured separately to avoid double counting.

Step 4: Prioritise the available initiatives

Not every identified opportunity should be implemented at the same time.

Prioritise potential initiatives against criteria such as:

• Estimated cash-flow effect
• Implementation cost
• Operational complexity
• Time required
• Data availability
• Supplier or customer impact
• Legal and accounting implications
• Technology dependencies
• Internal ownership
• Risk of disrupting existing operations
• Ability to measure the outcome

The roadmap can then group initiatives into practical implementation horizons.

Near-term operational improvements

These may include:

• Correcting invoice errors
• Resolving high-value customer disputes
• Accelerating billing
• Removing unnecessary approval delays
• Preventing duplicate or unplanned early payments
• Improving collections prioritisation
• Reviewing overdue or obsolete inventory

Medium-term process improvements

These may include:

• Standardising appropriate payment terms
• Automating invoice approval
• Improving cash application
• Redesigning credit-control processes
• Introducing supplier segmentation
• Improving demand forecasting
• Establishing new receivables or supplier-finance arrangements

Strategic transformation

These may include:

• Redesigning order-to-cash or procure-to-pay processes
• Introducing integrated working-capital technology
• Establishing multi-funder financing arrangements
• Using appropriately structured digital instruments
• Redesigning inventory and supply-chain policies
• Creating an enterprise-wide working-capital governance framework

The appropriate implementation sequence will depend on the organisation’s starting point, risk tolerance and available resources.

Step 5: Select the appropriate intervention

The solution should follow the objective.

If the underlying problem is inaccurate invoicing, financing the receivable does not correct the operational cause. If supplier liquidity is the concern, simply extending payment terms may worsen the problem. If the organisation requires additional funding capacity or geographic coverage, a different financing structure may be necessary.

Potential interventions include:

• Process improvement
• Payment-term review
• Receivables finance
• Supply chain finance
• Dynamic discounting
• Inventory finance
• Working Capital Notes™
• Digital bills of exchange or promissory notes
• A combination of operational and financing measures

Where digital instruments may be considered

Digital bills, notes and other appropriately structured electronic instruments may support working-capital programmes through consistent transaction records, lifecycle controls and a basis for financing.

Their legal effect is not automatic.

Under the UK Electronic Trade Documents Act 2023, an electronic version of a qualifying trade document may have the same legal effect as its paper equivalent when the statutory conditions are satisfied and a reliable system is used.

UNCITRAL’s Model Law on Electronic Transferable Records provides an international model framework, but it is not binding law in every country. Its effect depends on implementation within the relevant jurisdiction.

Working Capital Notes™ are designed to provide a structured digital instrument for working-capital transactions. Depending on the programme structure, they may support auditability, lifecycle management and access to participating liquidity providers.

Their suitability and legal effect depend on:

• The instrument's terms and proper execution
• Governing law
• Recognition in the relevant jurisdictions
• Platform configuration and reliability
• Data quality and verification
• Funder acceptance
• Transaction documentation
• Accounting and tax treatment
• Credit, compliance and sanctions requirements

Digital records do not become negotiable or legally enforceable solely because they contain structured information or a tamper-evident audit trail.

Step 6: Build the business case and governance model

A strong business case should explain more than the potential liquidity benefit.

It should cover:

• The problem being addressed
• The financial baseline
• The estimated cash-flow improvement
• Implementation and ongoing costs
• Supplier and customer effects
• Operational requirements
• Legal, accounting and tax considerations
• Technology dependencies
• Principal risks
• Success measures
• Named owners
• The proposed implementation sequence

Executive sponsorship can provide the authority needed to resolve cross-functional issues, but successful delivery also requires clear operational ownership.

Relevant stakeholders may include:

• Treasury
• Finance
• Accounts receivable
• Accounts payable
• Procurement
• Sales
• Credit
• Supply chain
• Legal
• Tax
• Accounting
• Technology
• Risk and compliance

The organisation should assign responsibility for decisions, exceptions, reporting and escalation rather than relying on informal coordination.

Accounting considerations should be addressed early. The IASB amended IAS 7 and IFRS 7 to introduce additional disclosures concerning supplier-finance arrangements, including their effects on liabilities, cash flows and liquidity risk.

Financing or issuing an instrument does not by itself guarantee derecognition, continued trade-payables classification or a particular cash-flow presentation.

Step 7: Pilot, measure and scale

Where an initiative involves a new process, platform, financing provider or instrument, a controlled pilot can help test the operating model before wider deployment.

The size and duration of the pilot should reflect:

• Transaction volume
• Supplier or customer diversity
• Jurisdictions and currencies
• Systems involved
• Legal and compliance requirements
• Available funding capacity
• The level of evidence needed for a scale decision

Rather than applying a fixed number of participants or a universal implementation period, select a pilot group large and varied enough to test the programme’s key assumptions.

Measure:

• DSO, DPO, DIO and cash conversion cycle
• Buyer cash-flow effect
• Supplier access to early liquidity
• Eligible and financed transaction value
• Participation and utilisation
• Approval and processing times
• Rejections and exceptions
• Pricing and fees
• Disputes
• Reconciliation and settlement performance
• Operational workload
• User and supplier experience

A pilot should not be scaled solely because headline working-capital measures improve. The organisation should also confirm that the economics, controls, supplier outcomes, legal position, funding capacity and operating processes are sustainable.

Working capital optimisation is not late payment

DPO improvement should arise from agreed payment terms and controlled processes - not from delaying payment beyond the contractual due date.

For UK businesses within scope, payment practices and performance may be subject to statutory reporting requirements. Government guidance confirms that qualifying businesses must report specified information about their payment policies, practices and performance.

Financing availability should not be used to justify unfair terms or require suppliers to accept costly early-payment arrangements. Supplier participation should be properly documented and commercially appropriate.

Frequently asked questions

What is a working capital improvement roadmap?

It is a prioritised plan for improving the way an organisation manages receivables, payables and inventory. It connects financial opportunities with the operational, commercial and technological changes required to deliver them.

How long should the diagnostic take?

There is no universal timeframe. The duration depends on data availability, organisational complexity, the number of business units and the level of transaction analysis required.

Should a company focus on DSO, DPO or DIO first?

The priority should be determined by the organisation’s data. The largest numerical opportunity may not be the easiest, safest or most commercially appropriate initiative to implement.

Does receivables financing reduce DSO?

It can provide earlier cash, but it does not necessarily change when the customer settles the underlying receivable. Organisations should distinguish between the timing of financing proceeds and the customer’s contractual payment performance.

Can payment terms be extended without harming suppliers?

Potentially, but only where the revised terms are commercially appropriate. Early-payment options may help mitigate the supplier cash-flow effect, but their availability does not automatically make longer terms fair or sustainable.

Are Working Capital Notes™ legally enforceable?

Their enforceability depends on their structure, execution, governing law, applicable legislation, transaction documentation and the reliability of the electronic system used. A transaction-specific legal review is required.

From analysis to measurable improvement

A working capital roadmap should begin with evidence, not a predetermined financing product or target ratio.

The organisation must first understand where cash is tied up, what operational or commercial factors created the position and which interventions can address the underlying causes.

From there, treasury and finance teams can quantify the opportunity, prioritise the most appropriate initiatives and implement them through clear governance and measurable phases.

The result should be more than a temporary movement in DSO, DPO or DIO. It should be a controlled and sustainable improvement in how cash moves through the organisation.

To assess your working-capital position and explore the most appropriate operational or financing interventions, contact ETR Digital.

This article provides general information only and does not constitute legal, accounting, tax, investment or financial advice. Organisations should obtain professional advice based on their circumstances, transaction structure and applicable jurisdictions.