How to improve working capital: a UK guide

The three working capital levers

• DPO - days payable outstanding. How long you take to pay suppliers.
• DIO - days inventory outstanding. How long stock sits before it sells.
• DSO - days sales outstanding. How long customers take to pay you.

The cash-conversion cycle is DIO + DSO - DPO. Every day out of the cycle is real cash back on the balance sheet. On a business turning over £100m at typical margins, a 10-day improvement usually releases £2-3m of cash.

DPO: payment terms without breaking suppliers

Extending payment terms is the most obvious lever and the easiest to overplay. A blanket extension buys cash once, then suppliers price it back in at renewal. The disciplined version is category-aware.

• Benchmark current terms against category norms, not internal history
• Extend on tier-two and tier-three suppliers where the market supports it
• Hold or shorten on strategic suppliers where flexibility is worth more than the cash
• Offer early-pay discounts where the discount is cheaper than your cost of capital

DIO: inventory is usually the biggest single lever

For product businesses, inventory almost always releases more cash than payables. A 10-day reduction in cover on £15m of stock is about £4m of cash - without extending a single supplier term.

• Retire tail SKUs contributing less than 5% of revenue
• Recalculate safety stock on actual, not contracted, lead times
• Move slow movers to make-to-order or drop-ship where feasible
• Tighten forecast horizons on volatile categories to reduce over-order

DSO: getting paid faster without losing customers

• Invoice on completion, not on month-end batch
• Automated dunning on the top 20 overdue accounts
• Credit checks and terms review on new accounts above threshold
• Direct debit or card-on-file for repeat, low-value customers

A realistic working capital improvement plan

Weeks 1-4: diagnostic

• DPO, DIO, DSO by category, customer and business unit
• Cash-conversion cycle baseline and peer benchmark
• Sizing of the addressable prize by lever

Weeks 4-12: quick release

• Terms reset on tier-two and tier-three suppliers
• Dunning discipline on the top 20 overdue accounts
• SKU tail review on the top slow-moving categories

Months 4-9: hold and compound

• Working capital governance and monthly cadence
• Inventory cover targets embedded in category ownership
• Customer terms review on annual renewals

What working capital optimisation is realistic?

For a UK mid-market business that has not run a serious working capital programme in 3+ years, a well-scoped effort typically releases 10-20% of net working capital over 6-9 months - and holds it with the right governance. On a business with £30m of NWC, that is £3-6m of cash out of the balance sheet.

Where this connects

Working capital work runs alongside our cash flow improvement guide, the business turnaround guide and our supply chain optimisation service on the inventory side.