Profitability and liquidity are connected, but they are not interchangeable.
A company can report rising revenue, maintain healthy operating margins and still experience financial pressure if cash does not arrive when expected.
That distinction has always mattered.
It is becoming increasingly important as businesses deal with longer payment cycles, volatile inventories, complex supply chains and uncertain demand.
For finance teams, the working-capital question is therefore changing.
It is no longer only:
How efficiently can working capital be managed?
Increasingly, companies also need to ask:
How much working-capital disruption can the business absorb before it needs additional liquidity?
This is creating a stronger focus on what might be described as a cash conversion buffer: sufficient financial flexibility to withstand changes in collections, inventory or supplier payments without immediately disrupting operations.
Working Capital Is an Operating System
Working capital is often discussed as a finance metric.
In practice, it reflects how the company operates.
Accounts receivable depends on customer payment behaviour.
Inventory reflects purchasing, production and demand forecasting.
Accounts payable reflects supplier terms and procurement decisions.
These functions do not sit entirely inside finance.
A sales decision can increase receivables.
A procurement decision can increase inventory.
A supply-chain disruption may force the business to hold additional stock.
Working capital therefore becomes a financial expression of operational decisions.
J.P. Morgan's current overview of working-capital management describes working capital as a measure of the ability to fund daily operations and meet short-term obligations, while also linking effective management to flexibility during periods of economic uncertainty. (JPMorgan Chase)
Why the Issue Is Becoming More Important
The amount of cash tied up inside business operations remains significant.
PwC's 2025/26 Working Capital Study, based on an analysis of more than 17,000 companies worldwide, found that global days sales outstanding increased from 47.3 days in 2015 to 50 days in 2024. (PwC)
Longer collection periods mean cash remains tied up for longer after revenue has already been recognised.
Allianz Trade has identified a similar pattern. Its global working-capital research found that working-capital requirements increased by two days in 2024 to 78 days of turnover, the highest level since 2008. Allianz Trade's Working Capital Requirements and DSO report also reported longer payment terms as an important contributor to the increase. (Allianz Trade Corporate)
For companies, these trends increase the importance of liquidity resilience.
Efficiency Can Become Fragility
Companies have spent years attempting to remove unnecessary working capital.
Inventory can be reduced.
Receivables can be collected faster.
Supplier payment terms can be extended.
Those actions can release cash and improve returns.
But maximum efficiency is not necessarily maximum resilience.
A business operating with extremely low inventory can become vulnerable to supply disruption.
A company relying on customers paying exactly on schedule may face pressure when collection periods increase.
A business that pushes supplier terms aggressively may weaken relationships it later needs during periods of constrained supply.
The challenge is therefore not simply minimising working capital.
It is determining the right level for the operating model.
The Cash Conversion Cycle Shows Where Money Waits
One of the most useful measures is the cash conversion cycle.
J.P. Morgan defines the cash conversion cycle as the time required to convert inventory and receivables back into cash available for reinvestment. (JPMorgan Chase)
The calculation combines three elements:
Days Sales Outstanding + Days Inventory Outstanding − Days Payable Outstanding.
Each reflects a different operational decision.
Receivables show how quickly customers pay.
Inventory shows how long capital remains stored in goods.
Payables indicate how quickly suppliers need to be paid.
The value of the metric is that it connects operations directly to liquidity.
Receivables Can Be an Early Warning Signal
Accounts receivable often provides one of the first indications that business conditions are changing.
Customers may remain financially viable while taking longer to pay.
They may negotiate extended terms.
Invoice disputes may become more frequent.
Large customers can use their purchasing power to stretch payment periods.
Each change may appear manageable individually.
Across a large receivables portfolio, the effect on cash can become significant.
This is why finance teams need to look beyond the total value of outstanding invoices.
The ageing profile matters.
So does concentration.
If payment delays are becoming concentrated within a specific industry or among several large customers, the company's liquidity exposure may be greater than headline revenue figures suggest.
Customer Concentration Is Also Cash Concentration
Revenue concentration is usually discussed as a sales risk.
It has a working-capital dimension as well.
Suppose one customer represents a significant share of annual turnover.
If that customer pays reliably, the exposure may appear manageable.
But a shift from 30-day to 60-day payment behaviour can create a substantial liquidity requirement.
Finance teams can therefore benefit from measuring not only revenue concentration but cash-flow concentration.
How much cash is expected from the customer during a particular period?
What happens if it arrives one month late?
Can normal operations continue?
The answers can reveal financial vulnerability that ordinary sales reporting does not show.
Inventory Is Cash in Another Form
Inventory is usually treated as an operational asset.
Financially, it is capital waiting to return as cash.
When inventories rise, more liquidity becomes trapped inside warehouses, supply chains and production systems.
Sometimes that is deliberate.
Businesses may increase safety stock to reduce the risk of disruption.
They may purchase components before expected price increases.
They may carry more inventory to support growth.
These decisions can improve operational resilience while reducing financial flexibility.
Finance teams therefore need to understand why inventory is changing.
An increase caused by deliberate resilience planning is fundamentally different from an increase caused by unsold products.
Both consume cash.
Their implications are different.
Supplier Terms Are Not Free Financing
Payables represent another major lever in the cash conversion cycle.
Increasing payment periods can improve near-term cash flow.
But supplier financing has limits.
Vendors have working-capital requirements of their own.
Repeatedly stretching payments can lead suppliers to tighten terms, request deposits, increase prices or prioritise other customers.
This is particularly relevant for strategic suppliers where availability matters more than the short-term financial benefit of delayed payment.
Working-capital management therefore needs to recognise relationship value.
Sometimes paying a critical supplier earlier can be financially rational if it protects access to capacity or favourable terms.
Cash Forecasts Need Scenarios
Many cash-flow forecasts produce one expected number.
Reality does not behave that precisely.
Invoices can arrive late.
Projects can slip.
Demand can weaken.
Costs can increase unexpectedly.
Scenario-based cash forecasting can help companies understand the range of possible outcomes.
What happens if customer collections slow by ten days?
What if a major customer is 30 days late?
What if inventory needs increase?
What if revenue falls while fixed costs remain stable?
The purpose is not to predict exactly what will happen.
It is to understand how much deviation the liquidity structure can withstand.
The Cash Conversion Buffer
This is where the buffer becomes important.
A cash conversion buffer can include several sources of liquidity.
It may consist of cash held on the balance sheet.
It can include committed credit facilities.
Unused borrowing capacity may provide additional flexibility.
Businesses may also be able to reduce discretionary expenditure or monetise certain liquid assets.
The key characteristic is accessibility.
Liquidity that exists theoretically but cannot be accessed quickly does not provide much protection during disruption.
That is also why committed financing can have value even when it is not currently being used.
Credit markets can tighten at the same time that companies need additional cash.
Liquidity Quality Matters
A headline cash balance does not always tell management how resilient the organisation actually is.
Companies need to understand the quality of liquidity.
How much cash is unrestricted?
Where is it held?
Can it move freely between entities and jurisdictions?
How much committed credit capacity remains?
When do facilities mature?
Are there covenants that could restrict access?
How much liquidity depends on future collections?
These questions become particularly relevant for multinational organisations.
A corporate group may appear to have substantial cash while individual subsidiaries face constraints on moving or accessing it.
Liquidity therefore requires visibility as well as volume.
Technology Is Making Working Capital More Observable
Better data is allowing finance teams to monitor working capital more frequently.
Receivables trends can be analysed in real time.
Payment patterns can be compared.
Inventory movements can be tracked more precisely.
Automation can reduce invoice-processing delays and improve reconciliation.
Artificial intelligence may also support short-term cash forecasting and identify unusual payment behaviour.
But technology does not change the underlying economics.
A dashboard can show that customers are paying later.
It cannot make them pay.
An AI system can identify inventory accumulation.
It cannot determine by itself whether that stock represents strategic protection or weakening demand.
Financial judgement remains essential.
Resilience Does Not Mean Hoarding Cash
Building a cash conversion buffer should not mean accumulating unlimited liquidity.
Cash carries an opportunity cost.
Excess inventory consumes capital.
Unused financing facilities can involve fees.
Overly conservative working-capital policies can reduce returns.
The objective is therefore not maximum protection.
It is deliberate protection.
Companies need to understand how much working-capital volatility their business model naturally creates and maintain appropriate capacity around it.
A subscription company with predictable monthly collections may require a different liquidity buffer from a construction business dependent on large milestone payments.
There is no universal target.
The Working-Capital Question Is Changing
For years, companies were encouraged to ask:
How much cash can we release from working capital?
That remains important.
But another question deserves equal attention:
How much disruption can our working-capital system absorb?
PwC's finding that global collection periods have lengthened and Allianz Trade's evidence of elevated working-capital requirements suggest that this question is becoming more relevant. (PwC)
Companies with adequate liquidity flexibility can continue making decisions based on long-term value when conditions deteriorate.
Those without it may need to cut expenditure, delay investment, dispose of assets or secure financing under unfavourable conditions.
Working capital is therefore no longer only an efficiency exercise.
It is part of a company's ability to preserve strategic choice.
And in uncertain conditions, maintaining that choice may be more valuable than extracting the final increment of short-term efficiency.
References
PwC — Working Capital Study 2025/26. PwC Working Capital Study
Allianz Trade — WCR and DSO Report 2025. Allianz Trade
J.P. Morgan — Strengthen Financial Health via Working Capital Management. J.P. Morgan
J.P. Morgan — Your Cash Conversion Cycle — What It Is and How to Optimize It. J.P. Morgan Cash Conversion Cycle
Allianz Trade — Cash Back to Shareholders or Cash Stuck to Finance Customers. Allianz Trade Working Capital Analysis