Paladin Management Group

Key Takeaways

• Working capital represents the cash required to run day-to-day operations. When managed well, it provides internal funding for growth. When mismanaged, it forces reliance on external capital.
• Three early signals of underperformance are rising DSO without revenue growth, inventory building without a clear operating reason, and stretching payables as “normal practice” to manage liquidity.
• In cyclical and post-close M&A environments, disciplined working capital management allows companies to meet demand spikes and invest in growth without scrambling for financing.
• Sustainable improvement requires diagnosing and correcting the underlying operational drivers behind the metrics.

Introduction

Working capital isn’t a reporting metric. It’s cash.

If your customers owe you money and you haven’t collected it, that’s cash you don’t have.

If you’ve got three years of inventory sitting in a warehouse, that’s cash you’ve already spent.

And if you don’t have that cash when you need it, you’re going to borrow it — probably at rates above your weighted average cost of capital (WACC). That’s expensive. And most of the time, it’s avoidable.

As we know, working capital is the difference between current assets and current liabilities, representing the cash required to run day-to-day operations. Managed well, it funds growth internally. Managed poorly, it forces you into the market for capital you shouldn’t need.

Here are three signals your working capital is underperforming.

1. DSO Is Creeping Up Without Revenue Growth

Day Sales Outstanding (DSO) measures how quickly you collect cash from customers. DSO reflects the average number of days it takes to convert sales into cash.

According to APQC’s March 2025 cross-industry benchmarking data:

• The median DSO across more than 10,500 organizations is 38 days.
• The same dataset shows a median cycle time of 22 days from invoice transmission to receipt of payment.

Those numbers will vary by industry and contract structure, but they provide useful context.

If revenue is rising and DSO rises proportionally, that may be normal.

But if DSO is climbing while revenue is flat — especially if it’s moving meaningfully above your industry benchmark — something is breaking down. This could signal:

•  Billing is inaccurate.
• Collections lack rigor.
• Customers are disputing invoices.
• Product or service quality has slipped and customers are showing their frustration by not paying on time.

Whatever the cause, the outcome is the same: customers owe you money that should already be in your account.

If DSO moves from 30 days to 35 to 40 without a clear reason, that’s a signal.

 2. Inventory Is Building Without a Clear Operating Reason

Inventory can be strategic.

Stocking up ahead of a seasonal spike? That’s planning.
Ordering early to manage a supplier disruption? That’s risk management.

But when inventory keeps growing and the explanation is “just in case,” that’s not strategy. That’s cash sitting still.

I recently worked with a company with fairly reliable 16-week lead times sitting on over three years of inventory. Much of it was ordered during supply chain disruptions from several years ago. They continued buying new designs because customers “wanted the latest model.”

The result? Millions tied up in obsolete product that wasn’t moving.

That’s capital already spent — capital that can’t fund hiring, product development, or expansion.

When the next opportunity appears, the company has to borrow to pursue it.

If inventory isn’t moving, it’s a liquidity warning.

 3. You’re Stretching Payables to Manage Liquidity

Accounts payable is a lever, but it shouldn’t be your primary one.

If vendors are calling before finance does, or stretching terms becomes standard practice, that’s often a symptom of imbalance elsewhere.

Stretching payables may improve short-term liquidity, but it’s rarely a long-term strategy.

If you’re relying on extended payment terms to manage cash, ask why:

• Are receivables lagging?
• Is inventory overbuilt?
• Is cash discipline inconsistent?

Using payables as your main liquidity tool usually means something upstream isn’t working.

Why This Matters for Growth

Effective working capital management allows you to fund growth without external capital.

That means launching products without drawing down the revolver. Scaling headcount without negotiating new credit terms. Navigating demand spikes without scrambling for financing.

When it’s working, growth gets funded internally. When it’s not, you’re calling the bank.

What To Do If You See These Signals

• Don’t treat the metric. Diagnose and treat the root cause. Working capital performance is ultimately an operating discipline issue, not just a finance metric.If DSO is rising, something is breaking down in how you bill, collect, or deliver.
• If inventory is building, something is off in how you forecast, buy, or sell.
• If payables are stretching, something upstream is forcing you to manage cash reactively instead of deliberately.

The number one question to ask is: Why is this happening?

In our experience, working capital underperformance is a symptom of one or a combination of operational issues: billing errors, weak collections discipline, poor forecasting, unreliable suppliers, customer quality issues, or product execution gaps.

Fixing the metric without addressing the underlying issue just shifts the pressure somewhere else.

That’s where we come in.

Paladin helps leadership teams run a disciplined diagnostic, isolate the root causes, and correct the underlying operating issues so cash actually moves. The objective isn’t short-term optics. It’s unlocking capital to fund growth without relying on external financing.

About the Performance Improvement Playbook

The Performance Improvement Playbook is Paladin’s monthly series exploring real-world challenges in execution, integration, and value creation. Each edition delivers practical guidance drawn from hands-on work with leadership teams navigating moments of change.