Working capital: what it is and how to release it

Working capital is the cash operationally tied up in the day-to-day running of a company. Net working capital is calculated as current assets minus current liabilities; operating working capital as inventory plus receivables minus trade payables. You release it by shortening the collection period for receivables (DSO), shortening the inventory turnover period (DIO), and extending the payment period to suppliers (DPO). Every day saved across this triangle returns money back to the company. For companies with revenue of CZK 50 to 500 million, this typically amounts to millions of crowns that today sit in the warehouse and in unpaid invoices instead of in the bank account.

What working capital is and why it matters

Working capital is the portion of assets that a company permanently holds simply so that it can operate at all. You have to buy and stock goods before you sell them. You give customers payment terms, so the cash from a sale arrives weeks later. And you pay suppliers according to their terms. The difference between what you have tied up in inventory and receivables and what your suppliers still owe you is the cash a company has to borrow somewhere or hold from its own resources.

In accounting terms, there are two views. Net working capital is current assets minus current liabilities. It is the broader balance-sheet metric and includes cash and short-term loans. Operating working capital is narrower and more useful for cash flow management: inventory plus trade receivables minus trade payables. This is what shows how much money is tied up in the operating cycle itself, without the effect of financing and free cash.

This is not an academic distinction. A company can report a profit and still be unable to make payroll, because the entire profit and more is sitting in the warehouse and in unpaid invoices. Working capital is the bridge between the income statement and the bank account.

Why growth devours cash

The most dangerous property of working capital is that it grows together with revenue. When you double turnover, you typically need roughly double the inventory and your receivables also double. Payables to suppliers do grow as well, but usually not enough to cover the gap. The result is a paradox we see in practice again and again: the faster a company grows, the more cash disappears from its account, even though it is profitable.

This phenomenon is called the growth trap. The company is delighted by new orders, but every new order first consumes cash (buying materials, payroll, customer payment terms) and only returns it later. If a company does not manage working capital, it finances its growth with an overdraft and factoring, without understanding why it is short of money.

The situation in the Czech Republic is made harder by payment discipline. According to the EU Payment Observatory, the average time to settle B2B invoices in the Czech Republic in 2024 was 62.3 days, the second longest in the entire EU, right after Croatia. The public sector paid suppliers on average in 73.8 days, the longest of all the Union's countries.¹ Each additional day of payment terms means more money tied up in receivables, which you have to finance from something.

Three levers: DSO, DIO and DPO

Working capital is not released by general calls to cut costs, but by three specific levers. Together they form the cash conversion cycle (CCC), that is, the number of days your cash is tied up in operations before it returns.

The formula is simple: CCC = DSO + DIO − DPO. The lower the number, the less cash you need for the same volume of revenue. A negative CCC, where customers pay you before you pay suppliers, is the holy grail (typically retail and e-shops). For each of these levers we have a separate analysis, which we link to below.

It is important not to overdo DPO. Extending payment terms with suppliers is a legitimate lever, but only to the point where you do not start paying late, lose early-payment discounts, or damage relationships with key suppliers. The goal is a negotiated longer term, not a quiet default at the supplier's expense.

An illustrative example: how many days are worth real money

Take a model company with annual revenue of CZK 200 million and purchases (cost of goods sold) of CZK 140 million. The figures are illustrative and serve to explain the mechanics.

Receivables today tie up roughly CZK 200 million × 62 / 365 ≈ 34.0 million. After cutting DSO to 50 days they fall to ≈ CZK 27.4 million, that is, by CZK 6.6 million. Inventory (calculated from purchases) falls from CZK 140 million × 55 / 365 ≈ 21.1 million to ≈ CZK 17.3 million, that is, by CZK 3.8 million. Payables, on the contrary, rise from CZK 140 million × 30 / 365 ≈ 11.5 million to ≈ CZK 15.3 million, which returns a further CZK 3.8 million to the company. Together, cutting the cycle from 87 to 55 days releases roughly CZK 14 million in cash, without selling anything extra. This is money the company otherwise holds in its operating bank account or borrows.

How much cash is at stake

That this is not a marginal problem is shown by figures from large studies. According to the PwC Working Capital Study 24/25, companies globally are holding roughly EUR 1.56 trillion in excess working capital, with DSO having risen by 6.6 % over the past five years.² In its European Payment Report 2024, Intrum quantified that European companies were waiting on receivables worth at least EUR 10.5 trillion.³ A large part of this cash is tied up needlessly, simply because no one systematically manages payment terms, inventory, and payment dates.

For companies with revenue of CZK 50 to 500 million, this means in practice that even a modest shortening of the cycle by 10 to 20 days typically releases anywhere from a few to several tens of millions of crowns. This cash is, moreover, cheaper than any loan, because it is your own and you pay no interest on it.

How to start

Managing working capital does not begin with a big project, but with measurement. Calculate your current DSO, DIO, and DPO from the balance sheet and income statement, build the CCC from them, and compare it with your industry. Then look for the single largest lever. In manufacturing and wholesale it tends to be inventory (dead stock, excessive safety stock), in services and B2B usually receivables (loose payment terms, a weak dunning routine). Only then deploy specific measures and track the trend month by month.

From our practice, the most common mistake is that a company addresses working capital only when it runs out of cash. At that point the negotiating position is weak and people reach for expensive financing. Yet working capital can be managed continuously, like any other operating metric. The numericky.cz team, led by Ing. Martin Parizek, CFA, builds exactly this kind of system for clients: a single overview of DSO, DIO, DPO, and CCC that shows where the tied-up cash sits and how many days stand between you and free money.