Working Capital: Your Most Overlooked Source of Growth Capital

Working Capital: Your Most Overlooked Source of Growth Capital

When finance leaders talk about fueling growth, the first instinct is often to look outward: raise equity, secure new debt, or refinance existing credit lines. But in many PE-backed companies, the smartest capital isn’t external—it’s already sitting inside the business.

That capital is working capital.

Optimizing working capital—especially accounts receivable (AR)—is one of the fastest, most controllable ways to unlock liquidity and fund growth without diluting ownership or increasing leverage. And often, a few operational tweaks can free up six- or even seven-figure amounts that can be reinvested into inventory, sales, talent, or strategic projects.

Here’s why it matters—and how to get started.

What Is Working Capital—and Why Is It So Powerful?

At its core, working capital is the difference between your current assets and current liabilities. It’s the cash cushion that allows your business to operate day to day: covering payroll, vendor payments, and operational expenses while you wait for customers to pay.

Working Capital = Current Assets – Current Liabilities

But when AR balloons, or inventory sits too long, or payables aren’t managed strategically, that cash gets trapped in the system—and can’t be put to use elsewhere.

In PE-backed environments, where speed to value creation is paramount, tight working capital management isn’t just good hygiene—it’s a competitive advantage. Freeing up internal cash can help fund an acquisition, avoid a borrowing base crunch, or give the CFO breathing room during a tough quarter.

The Math Behind 1 Day of DSO

Let’s make this real.

Imagine a company with $50M in annual revenue and a Days Sales Outstanding (DSO) of 60. That means on average, it takes 60 days to collect cash from customers.

Now let’s say you reduce DSO by just one day—from 60 to 59.

Here’s what happens:

• Daily revenue = $50M / 365 ≈ $137,000
• 1-day reduction in DSO = ~$137,000 in freed-up cash

If your company has $150M in revenue? That’s over $410,000 released.

Multiply that across multiple working capital levers—like tightening inventory turns or adjusting vendor terms—and you’re looking at real, reinvestable cash.

And unlike a new credit facility, it doesn’t require a 60-day process, board approval, or new covenants.

Why This Cash Often Goes Untapped

Most finance teams know that working capital matters—but in practice, it often falls between the cracks. Why?

• AR and AP are siloed in accounting, with little visibility across the full cash cycle
• Excel-based forecasts don’t surface hidden delays in collections or payables
• Sales teams aren’t aligned with finance to prioritize on-time payments
• No system-wide accountability for cash conversion cycle (CCC) improvement

This is especially true in middle-market companies, where lean teams are focused on compliance, monthly close, and reporting to the PE sponsor. Working capital optimization becomes a “nice to have”—until liquidity gets tight or credit lines shrink.

Turning Working Capital into Growth Capital: A 3-Step Playbook

1. Get Clear on the Cash Cycle

Before you can improve it, you need to see it. Start by mapping:

• DSO: How long are receivables outstanding?
• DPO: Are you paying vendors faster than you’re collecting cash?
• Inventory Days: Is cash tied up in slow-moving stock?

A tool like Pegasus Insights can help finance teams visualize this cycle daily—without the headache of consolidating spreadsheets or logging into multiple bank portals.

2. Find the Friction

Not all AR is created equal. Look for:

• Invoices delayed by manual approval processes
• Customers who consistently pay late
• Contract terms that favor extended payment cycles
• Internal lag between delivery and invoicing

Small fixes (e.g., setting up ACH instead of checks, enforcing consistent follow-up cadence) can shave days off your DSO with minimal effort.

3. Create Shared Ownership

Working capital isn’t just a finance problem—it’s an operational one.

• Involve sales and account management in payment terms
• Educate the ops team on how delivery timing affects AR
• Set goals and KPIs for DSO and working capital improvement
• Make it part of the monthly operating review with your sponsor

The more your entire org understands how cash flows—not just revenue—the easier it is to unlock internal capital.

What You Can Do with an Extra $100K–$500K in Liquidity

When you free up working capital, you’re not just fixing a balance sheet metric—you’re creating options. With that cash, you can:

• Fund an extra sales hire
• Ramp inventory ahead of peak demand
• Invest in automation or software to drive efficiency
• Avoid tapping into credit lines or delaying vendor payments
• Position the company for better exit metrics

In short: you create financial flexibility, the most valuable currency in any PE-backed company.

The Bottom Line

Working capital isn’t the flashiest value creation lever—but it’s often the fastest and most overlooked. Tightening DSO, managing payables strategically, and improving visibility across the cash cycle can generate real, reinvestable liquidity.

And in a world where every dollar counts—especially when you’re trying to fund growth or navigate uncertainty—that could make all the difference.