For a growing business, profitability and liquidity are related but different realities. A company can report rising sales and healthy margins while struggling to pay suppliers, meet payroll or fund its next order. The reason is often timing: cash leaves the business before customers pay, inventory is purchased before products are sold, and financing costs accumulate while management waits for revenue to arrive.
In a period of uneven demand and still-challenging borrowing conditions, working-capital management deserves the same executive attention as sales growth. The objective is not simply to minimise borrowing. It is to understand how cash moves through the business, choose financing that fits the underlying need and preserve flexibility when forecasts prove wrong.
Why financing availability is not the same as financing resilience
Small and medium-sized enterprises have many sources of funding, from bank lines and term loans to asset-based finance, leasing, trade credit and equity. These products serve different purposes, and their pricing cannot be compared fairly without considering tenor, collateral, fees and repayment conditions.
The OECD’s Financing SMEs and Entrepreneurs 2026 scoreboard draws on data from 48 countries and describes persistent financing pressures even as some borrowing costs began to ease. Its findings caution against treating a single interest-rate movement as evidence that credit has become readily accessible to all businesses. Borrower characteristics, lender standards and country conditions remain central.
The International Finance Corporation notes that micro, small and medium-sized enterprises form the overwhelming majority of firms globally and face a multi-trillion-dollar financing gap in emerging markets and developing economies. This is not a claim that every business lacks credit. It illustrates the structural challenge of matching diverse financing needs with products and institutions able to serve them sustainably.
Executives should therefore evaluate financial resilience in terms of usable liquidity, not the number of products offered by lenders. A facility available only after extensive documentation or additional collateral may not solve a sudden cash shortage.
Understand the cash conversion cycle
The cash conversion cycle links three operational measures: the time inventory is held, the time customers take to pay and the time a business takes to pay its suppliers. The calculation is typically expressed as inventory days plus receivables days minus payables days. A longer cycle means more cash may be tied up in normal operations, although the appropriate level varies substantially by industry.
Consider a distributor that pays for goods before a busy sales season but collects customer invoices two months later. The business may be profitable on each transaction while funding inventory, freight, wages and taxes in the meantime. A retailer collecting payment immediately has a different pattern. Comparing the two solely on revenue growth or reported margins would overlook their different financing requirements.
Management should track the components of the cycle separately. Rising receivables days may indicate slow customer payments, disputed invoices or a shift toward customers with longer terms. Rising inventory days may reflect optimistic forecasts or slow-moving products. Declining payables days might result from suppliers tightening terms, rather than a conscious policy to pay faster.
The purpose of the calculation is to identify operational causes. It should not encourage aggressive collection or delayed supplier payments without considering commercial relationships and legal obligations.
Build a short-term forecast that survives changing assumptions
An annual budget can be useful for strategy but too coarse for daily liquidity decisions. Many firms benefit from a rolling, short-term cash forecast that records expected receipts and payments by week, alongside a longer view of capital spending, tax and debt obligations.
The forecast should distinguish committed cash flows from estimates. Contracted loan repayments and payroll dates may be relatively predictable. Customer payment dates, new sales and supplier price changes involve greater uncertainty. A single central estimate can create false confidence if the business does not examine delays or weaker trading conditions.
Scenario planning need not be complex. Management can test what happens if a major customer pays 30 days late, if input prices rise or if an anticipated order does not materialise. The output should show the lowest projected cash balance, available borrowing capacity and the point at which action would be required.
A useful forecast is updated against actual cash movements. Persistent differences between forecast and outcome should lead to better assumptions, not merely explanations after the event. Finance teams can involve sales, procurement and operations in this process because those functions often know about likely changes before the general ledger reflects them.
Compare the full cost of financing
The advertised interest rate is only one part of borrowing cost. Arrangement fees, commitment fees, unused-line charges, mandatory services, legal expenses and early-repayment terms can change the economic outcome. Some products also require personal guarantees, charges over assets or restrictions on additional debt.
Consider two hypothetical offers for the same short-term need. One has a lower stated rate but requires substantial upfront fees and a minimum borrowing period. The other has a higher stated rate but allows flexible drawdowns and repayment. The cheaper option depends on the amount actually used and the time the funds remain outstanding. Comparing only annual interest rates may therefore produce the wrong decision.
Businesses should model total cash paid under realistic usage patterns and understand what happens if borrowing is extended or reduced. A revolving facility may suit fluctuating cash needs, while a term loan can align better with a longer-lived asset. Using short-term, expensive finance for investment with a slow payback can create refinancing pressure; using long-term debt to cover a temporary billing delay may also be inefficient.
The Federal Reserve’s 2026 survey of US employer firms reports that 60% applied for financing in the preceding year. Among applicants, 42% received the full amount requested, 36% received some or most, and 22% received none. These figures describe the surveyed firms and should not be generalised to every market. They nevertheless illustrate why prudent businesses consider financing availability before an urgent funding gap appears.
Treat receivables as a credit portfolio
A sales ledger is not simply a list of amounts due. It is a collection of credit exposures whose risk changes by customer, sector and payment behaviour. Strong growth can increase concentration if a small number of buyers account for a large share of outstanding invoices.
Finance teams should examine the age of receivables, disputed balances, customer concentration and the reasons payments are late. Commercial teams need to understand the cash effect of offering longer terms to win business. A sale with a healthy gross margin may become less attractive if it requires extensive financing or presents a high risk of non-payment.
Early communication can be more effective than late escalation. Clear invoice details, agreed purchase-order references and prompt resolution of disputes reduce avoidable delays. Businesses considering invoice finance or factoring should compare costs, recourse provisions, customer implications and the extent to which eligible invoices can actually be funded.
Digital records can help lenders and firms see cash flows more clearly, but the value depends on accuracy and consent. The World Bank’s Global Findex 2025 report describes growth in digital payments and the potential for payment records to support access to financial services. Its evidence primarily concerns adults' financial inclusion, so it should not be read as direct proof that every SME will receive better financing simply by accepting digital payments.
Inventory and supplier terms can release or consume cash
Inventory decisions are financial decisions. More stock may protect service levels or secure a volume discount, but it increases financing requirements and the risk of unsold goods. A discount should be assessed against storage, insurance, obsolescence and the cost of capital, rather than viewed as an automatic saving.
Supplier terms provide another potential source of flexibility. Extending payment periods may help cash flow, but can strain relationships or lead suppliers to increase prices. Paying early may be sensible when the discount exceeds the company's financing cost and liquidity remains sufficient. The analysis should include the risk of disrupting critical supply, not simply the arithmetic of payment days.
Working capital improves most sustainably when the underlying process becomes more reliable: better purchasing forecasts, fewer billing errors, clearer credit policies and faster resolution of exceptions. Shifting pressure to suppliers without addressing these processes may only defer the problem.
Match the funding product to the business event
Different funding needs call for different financing structures. A business purchasing equipment expected to operate for years may consider term financing or leasing that matches the asset's useful life. A company waiting for seasonal customer receipts may need a revolving working-capital line. An exporter financing goods in transit may assess trade-finance instruments where available.
Asset-based products can be useful when a business has eligible receivables or inventory, but advance rates, eligibility rules and reporting requirements influence how much liquidity is actually accessible. Equity can provide patient capital without scheduled debt repayments, but changes ownership and may be expensive if issued on unfavourable terms.
The OECD’s 2025 SME financing highlights reported a restrictive financing environment and a shift towards shorter-term funding for immediate needs in the periods it studied. The implication is not that short-term borrowing is always inappropriate. It is that financing structure should reflect the purpose and duration of the investment rather than simply the product a lender is willing to offer.
Make liquidity governance routine
Boards do not need to manage daily collections, but they should understand the firm's liquidity position and the assumptions behind its funding plan. Management reporting can show forecast cash headroom, covenant compliance, overdue receivables, inventory exposure and concentrations among customers, lenders and suppliers.
Responsibilities should be clear. Sales may approve customer terms, purchasing may negotiate stock commitments, and treasury may arrange finance, but these decisions affect the same cash balance. A routine cross-functional review can prevent one team from improving its own metric at the expense of overall liquidity.
Businesses should also establish triggers for action. A deteriorating collections trend, a lower projected cash buffer or a rise in borrowing utilisation may justify changes before a formal covenant issue or missed payment occurs. Contingency plans could include renegotiating spending schedules, reducing discretionary stock purchases or discussing facilities with lenders while options remain open.
The financial advantage is optionality
Working-capital discipline rarely produces a single dramatic announcement. Its value is that the organisation can continue paying suppliers, meeting obligations and funding opportunities without being forced into a poor transaction when liquidity tightens.
That outcome depends on more than obtaining the lowest possible rate. It requires accurate operational information, realistic cash forecasts, thoughtful financing choices and clear accountability for the decisions that move money through the business. For growing SMEs, managing that combination can be as important to long-term resilience as winning the next customer.
References
OECD — Financing SMEs and Entrepreneurs 2026—https://www.oecd.org/en/publications/financing-smes-and-entrepreneurs-2026_075d8058-en.html
IFC — MSME Finance—https://www.ifc.org/en/what-we-do/sector-expertise/financial-institutions/msme-finance
Federal Reserve Banks — 2026 Report on Employer Firms—https://www.fedsmallbusiness.org/2026-report-on-employer-firms/
World Bank — Global Findex 2025—https://www.worldbank.org/en/publication/globalfindex/report
OECD — SME Financing 2025 Highlights—https://www.oecd.org/en/publications/2025/04/oecd-financing-smes-and-entrepreneurs-scoreboard-2025-highlights_e7caeca1.html
