Managing Cash via Working Capital Optimization

Which is more important – profitability or positive Cash Flow? For those of you thinking, “Wait, how are they different in the first place?” just keep reading.

Know the difference between profits and cash flow to avoid falling into perilous business traps, Fishbowl Inventory BlogAs you noodle on that question, consider that 82 percent of entrepreneurial businesses fail because of poor cash management!

I would never suggest that profitability concerns should be secondary to cash concerns, but understand that profit doesn’t pay bills; cash does. In other words, Profit does not necessarily equal Cash Flow. They can be, and frequently are, significantly different, the main difference usually coming from working capital.

Working Capital

Working Capital can simply be defined as the cash you have put to work in your business. What is the cash “working on”? Good question. Typically there are three areas:

  1. Granting your customers short-term loans (aka Accounts Receivable)
  2. Paying for all that stuff in your warehouse (Inventory)
  3.  Short-term loans your vendors have given you (Accounts Payable)

Optimizing your working capital doesn’t have to be complicated. How well you have it optimized is always a function of how well you understand how cash moves through your business in the first place.

Cash Management

By asking two questions, I’ve found I can get an immediate and reliable representation of how good a company’s cash management practices are. I ask:

  1. “What is your cash balance right now and how much do you need in the next three months?”…and if you don’t know this, either figure it out or go to and place your order now, don’t laugh… it’s a real site.
  2. “How many days faster or slower do you pay your vendors than you collect from your customers?”

Their answers reveal whether the company understands cash management blocking and tackling. Great cash management principles and basic refreshers can be found at,, and, ranked in my perceived order of simple to sophisticated.

Once you’ve got these concepts, we always recommend doing two things: One, prepare a 13-week forecast, and two, relentlessly attack working capital.

Here are some thoughts on optimizing working capital.

Accounts Receivable: It is your money. Go get it. There are myriad strategies (see above links), but never, NEVER assume all your clients will simply pay you on time. Be proactive… reach out to them.

Inventory: Look out into the warehouse. If you see any inventory…there is probably opportunity for improvement. Typically you need technology to help optimize your inventory levels. QuickBooks or similar are adequate in some cases, but often you need something more robust like Fishbowl Inventory. You don’t want to enter the same data twice. Get Fishbowl Inventory and QuickBooks and integrate them seamlessly.

Accounts Payable: Ensure you’re paying your bills appropriately. Ask your vendors for terms so you know when they expect payment for shipments.

Study the concepts above, prepare, and execute your plan.


About Dave Chase

Dave Chase is a partner at Advanced CFO Solutions. At Advanced CFO Solutions, we provide outsourced accounting and financial services. We have served with more than 450 companies. Our clients see us as their strategic, outsourced CFO. We provide CEOs with critical information so they can make key decisions with confidence. We do this by leveraging our experience and technology to provide actionable information and results. And, we do it for a fraction of the cost of a full time employee. For more information, click here.
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