Working capital is not a finance metric. It is an operating system that touches every function in the company: sales (which determines receivable terms and collection effectiveness), procurement (which determines payable terms and ordering patterns), operations (which determines inventory levels and production scheduling), logistics (which determines delivery timing and stock positioning) and finance (which measures and reports the result).
A company that manages working capital as a finance metric will optimise the measurement. A company that manages working capital as an operating system will optimise the cash.
The Cross-Functional Problem
Receivables are a sales problem
The finance team reports receivable days. The sales team creates them. A salesperson who offers 90-day payment terms to close a deal has committed the company’s working capital for 90 days. A salesperson who does not follow up on overdue invoices has extended that commitment indefinitely.
The receivable balance is the cumulative result of thousands of credit decisions made by the sales team, one customer at a time. Managing receivables through the finance function, which measures the result, rather than through the sales function, which creates it, is managing the symptom rather than the cause.
Inventory is an operations problem
The finance team reports inventory days. The operations team creates them. A production manager who builds to forecast rather than to order creates finished-goods inventory. A procurement manager who orders in bulk to capture volume discounts creates raw-material inventory. A logistics manager who pre-positions stock across multiple warehouses for service-level reasons creates geographic inventory.
Each decision is individually rational. Collectively, they create an inventory position that may be 30% to 50% higher than what the business requires, trapping cash that the company needs for growth, debt service or investment.
Payables are a procurement problem
The finance team reports payable days. The procurement team negotiates them. A procurement function that negotiates on price alone, without considering payment terms, may achieve the lowest unit cost while creating the shortest payable cycle, which increases working-capital consumption.
A procurement function that negotiates on total cost (unit price, payment terms, early-payment discounts, delivery scheduling, quality terms) optimises the economic impact of the entire supply relationship, not just the invoice price.
The Command Centre
In Northrop Management Private Limited’s performance improvement work, the Working Capital Command Centre is a cross-functional governance structure that assigns operational ownership of working capital to the functions that create it.
Receivable ownership: Sales. The sales function owns receivable days and collection effectiveness. Targets are set. Performance is measured. Compensation is linked to collection, not just revenue.
Inventory ownership: Operations. The operations function owns inventory days and stock composition. Targets are set for each category (raw material, WIP, finished goods). Performance is measured against service-level requirements and holding-cost budgets.
Payable ownership: Procurement. The procurement function owns payable days and supplier terms. Targets are set for average payable days, early-payment discount capture and supplier financing utilisation.
Cash conversion ownership: Finance. The finance function owns the cash conversion cycle (DSO + DIO - DPO) and reports it as a cross-functional KPI. The CFO convenes a monthly working-capital review where all three owning functions report progress against targets and explain variances.
Quantifying the value
Every working-capital day has a calculable value: one day of revenue (for receivables), one day of COGS (for inventory) or one day of procurement (for payables), multiplied by the company’s cost of funding.
For a Rs 500 crore company with a cost of funding of 10%, one day of receivables equals approximately Rs 1.37 crore. A 10-day reduction in DSO releases Rs 13.7 crore of cash. A 15-day reduction in DIO releases Rs 20.5 crore of cash (calculated on COGS). A 5-day extension of DPO releases Rs 6.8 crore.
The total: a 30-day improvement in the cash conversion cycle releases approximately Rs 41 crore of cash, which can be used to fund growth, repay debt or return to shareholders, without any change in revenue, margins or operating model.
Ashish Chaudhary, frames the operational principle directly: “Working capital is a cross-functional operating problem disguised as a finance metric. The CFO can measure it. Only the sales team can fix receivables, only operations can fix inventory and only procurement can fix payables. Until each function owns its component, the CFO is reporting a problem that nobody is accountable for solving.”
Questions for the Boardroom
- Does each working-capital component (receivables, inventory, payables) have a named functional owner with targets and accountability?
- What is the cash value of one working-capital day for our business, and how many days of improvement are realistically achievable?
- Is our sales compensation structure linked to collection as well as revenue?
- Does our procurement function negotiate payment terms alongside unit price?
- Do we convene a monthly cross-functional working-capital review, or is working capital managed solely by the finance team?
Closing Implication
Working capital is trapped cash. Every day of receivables, every day of inventory and every day of payables represents capital that the company has deployed but cannot use. Releasing it does not require revenue growth, margin improvement or new investment. It requires the functions that create working capital to manage it as deliberately as they manage the activities that create it.
