Why Working Capital Belongs at the Start of a Transformation, Not the End

Transformations are done long before they deliver

Large transformation programs are assessed on a timetable that has little to do with when they produce results. Cost reduction takes quarters to show in reported numbers. Growth strategies take longer. The organization, meanwhile, forms a view within the first few months about whether this particular program is real, and that view is difficult to revise once it has settled.

McKinsey made this point in its January 2025 article on transformation momentum, observing that companies in the rush toward change often overlook or deprioritize the impact that improving net working capital can have at the beginning of the journey, and in doing so undercut the early momentum that change depends on.

That is a sequencing argument rather than a valuation one. Most finance leaders already accept that working capital matters. What tends to remain open is when to pursue it, and the common answer, somewhere in parallel, owned by finance, reporting into the program office, is close to the least effective option available.

This article examines why working capital is usually the fastest credible result a transformation can produce, what that speed is worth in the opening months, and what has to be in place before the sequence can work.

Why working capital is the accessible starting point

Three areas have been identified in research where change produces results quickly: mapping processes across the cash conversion cycle, adopting newer technologies, and deploying performance management capabilities. It estimates that work in those areas can improve a company's combined accounts payable and receivable balance by 30 percent or more within a matter of weeks, an estimate it bases on a stated sample of 50 companies undertaking cash optimization. The figure indicates an order of magnitude rather than setting a benchmark. The more durable part of the claim is what follows from it, that an early and visible result supports behavioral change and sustains commitment to the wider program.

Advisory company, Boston Consulting Group (BCG), writing separately that month about balance sheet optimization, puts the earnings effect of balance sheet clean-up at around 5 percent on average and as much as 10 percent for some companies. It describes net working capital as the pragmatic jumping-off point, the lever that frees cash to fund the transformation while the organization builds experience and momentum.

What makes working capital unusually fast

The speed does not come from working capital being easy. It follows from a structural feature that distinguishes it from most other levers: a substantial part of the early opportunity requires no agreement from anyone outside the organization.

McKinsey is explicit that much of the available improvement can be captured without significant supplier or customer interaction. On the payables side that includes three actions no counterparty has to approve.

Checking invoices against what was agreed

Verifying price, volume, and terms before payment rather than after, so that discrepancies are identified while there is still a basis to reject the invoice or withhold payment.

Testing the discounts already on offer

Running the trade-off calculation on early payment discounts rather than accepting or declining them by habit. This is a decision that has moved materially as capital has become more expensive.

Establishing a payment schedule

Batching payments to a defined cycle rather than processing them continuously, and settling invoices that have come due since the previous run rather than paying ahead of the next one.

None of that is a negotiation. It is a process problem presenting as a cash problem, which is why the first weeks of a working capital effort can produce results while a terms renegotiation is still being scheduled.

The funding argument, and what it does not claim

The second reason to sequence working capital early is that it contributes to funding what follows. A transformation drawing on cash released from the balance sheet is not competing for new external capital, and the cost of that external capital has risen. BCG assesses that a net new dollar of capital, whether cash or working capital, may now carry roughly double the cost it did a few years ago, attributing the pressure to technology and generative AI spending, higher interest outflows as cheaper debt rolls off, and inventory levels still elevated at many companies relative to pre-pandemic norms.

The argument should not be overstated. Cash released from working capital is not free capital. It has alternative uses, including debt reduction, returns to shareholders, and investment elsewhere in the business, and a transformation funded this way is still being funded at the opportunity cost of those alternatives. What it avoids is the incremental cost and the covenant and approval constraints that come with raising new external funding.

That distinction still favors early sequencing. Where the choice is between a program that generates capital in its opening phase and one that consumes capital before producing anything, the first is easier to approve and easier to sustain.

Where the opportunity tends to be largest

The available improvement is not evenly distributed. The opportunity is often larger in organizations that have neither centralized their operations by business unit or geography nor defined clear ownership of their processes.

That is a more actionable test than it first appears, because it describes a condition a leadership team can assess without a diagnostic exercise. Four questions tend to settle it.

Can total spend with the largest suppliers be stated across every entity? Where the answer requires reconciliation work, the same supplier is probably being contracted in more than one place on more than one set of terms.

Does anyone own the procure to pay process end to end? Is there a view of how current terms compare with the market? Internal systems describe the position accurately. They say nothing about whether it is competitive.

What an early win does to the rest of the program

The cash matters. The demonstration matters more, and it is the part that is difficult to produce by other means.

A transformation that delivers a measurable result in its first months has established something the organization cannot easily dispute, which is that change at pace is possible here. That claim is otherwise asserted rather than evidenced, and assertion wears thin quickly in organizations that have been through programs before.

There is a second effect, visible in the electronics case above. The work surfaces places where incentives and measurement are directed at the wrong outcome, which is frequently a more valuable finding than the cash itself.

The precondition most programs skip

There is a condition attached to all of this, and it is the reason the sequence fails more often than the logic does.

Sequencing working capital first requires knowing, in the opening weeks rather than the second quarter, where the opportunity sits. An organization that begins by assembling that picture from internal data spends the first phase of its transformation constructing a baseline, which is precisely the period the early result was meant to occupy. The momentum argument does not survive an analysis that takes longer than the program can wait.

Internal systems describe the current position well: what is paid, to whom, on what terms, and when. They are silent on the question that determines the size of the opportunity, which is whether that position is competitive. A supplier on 45 day terms is a fact. Whether comparable buyers in the same industry and geography typically operate closer to 75 days is the opportunity, and no internal system contains that comparison. Benchmarking against aggregated and anonymized market data, which is what Calculum's platform is designed to provide, is what makes the opportunity quantifiable at the start of a program rather than midway through it.

Sequencing it in practice

For a leadership team designing a program now, the argument reduces to a small number of decisions.

Place working capital in the first phase rather than in parallel. Treat it as the opening move whose output helps fund and legitimize what follows, rather than as a finance workstream running alongside the real program.

Separate the fast work from the slow work. Process improvements on both sides of the ledger can deliver within the first weeks. Terms renegotiation runs on a counterparty timetable and belongs in a later phase with its own sequencing.

Quantify the opportunity before committing to a target. A target set against last year's performance inherits last year's assumptions. A target supported by market evidence is more defensible internally and more negotiable externally.

Assign ownership outside finance from the start. The decisions that create working capital are made in commercial, purchasing, and supply chain teams, and a program that does not reach them will deliver once and then decay.

Decide what the released cash is for. Cash with no designated use tends to be reabsorbed. Naming it as the funding source for a specific part of the transformation is what makes the funding argument operational rather than rhetorical.

None of this makes working capital the most important thing a transformation does. It makes it the most useful thing to do first.

Frequently Asked Questions

Why should a transformation start with working capital rather than cost or growth?

Because it is usually the fastest credible result available. Cost reduction and growth initiatives generally take quarters to appear in reported numbers, while a substantial part of the working capital opportunity sits in internal process and can be captured without agreement from suppliers or customers. McKinsey and BCG both published in January 2025 treating working capital as the accessible entry point that builds momentum for a wider program rather than as the largest prize available.

How quickly can working capital improvements show results?

McKinsey estimates that work across process mapping, technology, and performance management can improve a company's combined accounts payable and receivable balance by 30 percent or more within weeks, based on a stated sample of 50 companies undertaking cash optimization. That indicates an order of magnitude rather than a benchmark, and the achievable pace depends heavily on how much of the opportunity sits in internal process as opposed to counterparty negotiation.

Does sequencing working capital first mean extending supplier payment terms first?

No, and conflating the two is a common error. Much of the early opportunity is internal: invoice verification, payment scheduling, discount evaluation, billing accuracy, and collections discipline, none of which requires a counterparty to agree. Term changes run on a supplier timetable and belong in a later phase. There is also a substantive question about how well undifferentiated extension works in a higher cost of capital environment, which McKinsey addresses directly.

Is cash released from working capital free funding for a transformation?

No. It avoids the incremental cost and the approval and covenant constraints that come with raising new external capital, which is a real advantage when capital is expensive. It is not costless, because the released cash has alternative uses including debt reduction, shareholder returns, and investment elsewhere. The argument for early sequencing is that the program generates capital in its opening phase rather than consuming it.

Who should own working capital performance during a transformation?

Not finance alone. McKinsey argues for cross-functional ownership spanning commercial, purchasing, supply chain, and finance, with the CFO among those monitoring the measures. BCG observes that optimization attempted by transactional finance teams in isolation is unlikely to succeed, because the decisions that consume working capital are made in the business rather than in accounts payable or receivable.

About Calculum

Calculum is an AI-powered payment terms intelligence platform that helps enterprise finance, treasury, and procurement teams benchmark payment terms against aggregated and anonymized market data, identify optimization opportunities, and make data-driven working capital decisions. With coverage across millions of companies globally, Calculum helps organizations quantify the working capital opportunity at the point a program is being designed, rather than discovering it once the program is already running.