Working capital
Working capital is the difference between current assets and current liabilities, representing the short-term liquidity available for daily operations. Procurement directly influences working capital through inventory levels, payment terms, and the timing of purchases and payments.
Examples
Payment terms optimization: Procurement negotiates extended payment terms from 30 to 60 days on $50M of annual spend, effectively freeing $8M in working capital that the business can deploy elsewhere—without costing suppliers if combined with supply chain financing.
Inventory reduction: Implementing VMI and consignment programs shifts inventory ownership to suppliers until consumption, removing $12M in stock from the balance sheet while maintaining material availability.
Dynamic discounting: A platform allows procurement to offer suppliers early payment (5-15 days) in exchange for a discount, capturing returns exceeding the company's cost of capital while improving supplier cash flow.
Definition
Procurement is one of the largest levers for working capital management. The three components under procurement's influence—inventory (current asset), accounts payable (current liability), and purchasing commitments—together represent a substantial portion of operating working capital.
Extending payment terms increases AP days outstanding, which improves the buyer's working capital position. However, if imposed unilaterally on suppliers, it simply shifts the working capital burden downstream—potentially weakening suppliers who lack financing access. Ethical approaches include supply chain finance programs that allow suppliers to receive early payment from a financial institution.
Inventory optimization directly impacts working capital. Every dollar of unnecessary stock ties up capital that could be invested in growth. Procurement can reduce inventory through: better demand forecasting, shorter supplier lead times, consignment arrangements, and more frequent smaller deliveries.
CFOs increasingly partner with procurement on working capital because the savings potential is significant and relatively quick to realize. A company spending $1B annually that extends average payment terms by 15 days frees approximately $40M in cash—equivalent to significant profit improvement.
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