Optimizing cash is among PE-backed CFOs’ most important jobs. Unfortunately, sponsors don’t think they’re excelling at it. According to our recent survey, half of sponsors say that their portfolio CFOs are not effectively optimizing working capital and liquidity. That’s a slight issue when access to affordable external cash is plentiful. But it’s a huge problem when it’s limited—and in today’s market, access is more limited than it’s been in years. Why?
- Rising costs of capital: Borrowing is more expensive. Central bank interest rates have increased by 364 to 450 basis points in the US, UK, and Europe from January 2022 to December 2024, and leveraged buyout yields are sitting above 10% in the US—the highest level in decades.
- Strained free cash flow: There’s less cash available for growth, reinvestment, or returns to investors, as LBO interest coverage ratios (EBITDA/cash interest) for US portfolio companies have declined by 1x since 2020. And with federal interest rates expected to remain elevated and likely policy shifts on the horizon, cash flow constraints are unlikely to ease anytime soon.
- Limited access to affordable leverage: The lack of affordable financing is making it increasingly difficult to fund strategic initiatives. In 2024, debt multiples for US portfolio companies fell to a 10-year low—highlighting the growing challenge of securing cost-effective leverage.
Four steps to unlock cash:
That’s all to say: cash isn’t up for grabs in the market right now, which is why it’s critical for CFOs to look within their business and find the hidden pockets of liquidity that already exist within the organization. The first place to look? Working capital which, when improved, can generate cash benefits equivalent to 5-9% of company revenue. There are 4-steps CFOs can take to turn working capital into immediate, accessible cash:
Step 1: Forget convention; fixate on data
Here’s a tough truth: many CFOs don’t have a clear idea of how much working capital they should carry. So, they rely on traditional methods: cash flow forecasting, benchmarking, and year-over-year comparisons. And that’s simply not good enough.
While these high-level/external targeting approaches are a useful starting point, they present significant precision pitfalls: cash flow forecasting struggles to adapt to real-time demands, benchmarking overlooks company-specific needs, and year-over-year comparisons ignore shifting macroeconomic conditions—resulting in excess capital tied up in the balance sheet.
The solution lies in the data. Effectively managing working capital requires a data-driven, transaction-level approach that uses granular, real-time data to align with the company’s specific policies, processes, and commercial terms (if this requires cleaning up/consolidating your data, so be it). From there, CFOs can more precisely determine targeted working capital levels that strike the optimal balance between liquidity and practicality.
Step 2: Seize cross-functional control
Sharing isn’t caring—at least when it comes to working capital performance. And while Finance typically owns the downstream processes that impact working capital performance, many of the key upstream activities (contract terms, billing, supplier sourcing, product introduction/management) are governed on a cross-functional basis. Of course, collaboration is key, but even the most competent teams working cross-functionally face accountability gaps, misalignment of priorities, system disconnects, and more. CFOs need to take control of the working capital optimization process from end-to-end.
Owning this process means that CFOs will need to implement strong controls across the entire working capital lifecycle that enforce and manage protocols (for example: customer, supplier, and product masters; payment authorization and timing; order and dispute management, etc.). More specifically, it means CFOs should standardize and strengthen operating procedures, enable cross-functional knowledge transfer, and leverage technology for visibility and control.
Step 3: Capture near-term wins
When CFOs consider working capital optimization, they tend to think about shifting customer payment behavior, rationalizing the supplier base, or implementing an entirely new S&OP approach—big changes that demand significant time and resource investment.
Instead, working capital optimization programs gain traction when they focus and deliver on near-term actionable improvements that don’t require massive structural overhauls. How can CFOs find these quick wins? They need to leverage financial and operational data to pinpoint where exactly working capital is being unnecessarily tied up, and which initiatives will generate the most value with the least disruption—whether in terms of harmonization, payment cycle rationalization, billing acceleration, slow-moving/obsolete inventory reduction, or other processes. By focusing on near-term wins that are within control, CFOs can begin to free up cash while laying the foundation for sustainable working capital optimization.
Step 4: Create a cash culture
Cash is king. It’s a message that not only needs to be reinforced, but it also needs to be operationalized. Why? Because too many PE-backed CFOs measure success in terms of revenue growth and EBITDA enhancement. Naturally, these are strong indicators of financial health, but they’re not cash—which means businesses can show strong revenue/EBITDA growth while still facing underlying liquidity issues (for example: your customers are slow to pay for your product or service. You have high reported top line, but less cash in the bank). When CFOs accelerate the cash conversion cycle, businesses have more liquidity available to fund acquisitions, pay down debt, and optimize capital usage to drive value long-term.
To create a cash culture, CFOs should collaborate with stakeholders to implement measures and incentives that drive cash conversion. This includes establishing key cash flow metrics (such as ROIC, DSO/DPO/DIO, and NWC as a percentage of revenue) while ensuring these targets are communicated cross-functionally and their impact is closely tracked. Ultimately, cash flow efficiency beyond revenue/EBITDA growth fosters greater flexibility to invest, scale, and manage debt—paving the way for more successful exits.
In a market where external cash is pricier and less accessible, CFOs need to take control of the data-driven, focused initiatives that unlock the cash already tied up in the business. Because at the end of the day, working capital optimization isn’t just a financial best practice—it’s a strategic value creation lever and business mandate for near-term liquidity enhancement and long-term success.