56. Logistics and Working Capital
How Inventory and Supply Chain Decisions Directly Impact Your Company’s Financial Health
What Is Working Capital?
Working capital is the amount of money a business has available to run daily operations. It’s calculated as:
Working Capital = Current Assets – Current Liabilities
For product-based businesses, one of the largest components of working capital is inventory — and logistics directly controls how much inventory is held, how quickly it moves, and how efficiently it is replenished.
How Logistics Affects Working Capital
Every box in a warehouse, every product in transit, and every pallet of unsold goods ties up cash. Efficient logistics help release that cash and convert it back into usable capital faster.
Here’s how:
1. Inventory Levels
The more inventory you hold, the more capital is tied up.
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Excess inventory increases holding costs and slows cash flow
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Lean inventory reduces capital needs, but increases stockout risk
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The goal is to balance service levels and inventory investment
Logistics strategies like Just-in-Time (JIT) and demand forecasting help optimize this balance.
2. Inventory Turnover and Cash Flow
A faster inventory turnover ratio means you’re selling products more quickly — converting stock back into cash.
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High turnover = more frequent cash inflow, less money trapped in inventory
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Low turnover = longer holding periods, more working capital tied up
Every improvement in logistics speed and accuracy — from supplier lead times to last-mile delivery — helps improve turnover.
3. Order-to-Cash Cycle
This is the time from ordering inventory to getting paid by customers.
Logistics directly influences the length of this cycle through:
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Lead times (how quickly goods arrive from suppliers)
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Fulfillment speed (how fast you ship to customers)
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Returns management (how quickly returned stock can be reprocessed and resold)
A shorter cycle means faster cash recovery, improving working capital health.
4. Accounts Payable and Receivable Timing
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If suppliers offer longer payment terms, you can delay cash outflows
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If customers pay quickly, cash comes in sooner
Logistics coordination (like using freight consolidation or drop-shipping) can reduce cost and align payment cycles.
Real-World Example
A consumer goods company held 90 days of inventory on average. This meant that a large portion of their working capital was locked in unsold products.
By implementing:
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Demand-based inventory planning
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Vendor-managed inventory (VMI)
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Third-party logistics (3PL) to reduce warehouse costs
They reduced inventory days from 90 to 45, freeing up over €2 million in working capital within a year — without impacting service levels.
Logistics Levers That Influence Working Capital
| Logistics Strategy | Working Capital Effect |
|---|
| Just-in-Time (JIT) | Reduces inventory holding, frees cash |
| Vendor-Managed Inventory | Shifts inventory ownership to supplier |
| Cross-Docking | Minimizes on-hand stock |
| Fast Fulfillment | Accelerates cash conversion cycle |
| Lean Warehousing | Lowers operating and carrying costs |
| Strategic Sourcing | Optimizes payment terms and inventory costs |
Key Metrics to Track
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Inventory Turnover Ratio
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Days Inventory Outstanding (DIO)
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Cash Conversion Cycle (CCC)
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Working Capital Ratio (Current Assets ÷ Current Liabilities)
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Average Inventory Value
Summary
Logistics is not just about moving goods — it’s about moving money.
Every inventory decision has financial consequences.
Efficient logistics operations can free up millions in working capital by reducing:
For businesses seeking financial flexibility, tight alignment between logistics and finance is essential.
The warehouse is not just a storage space — it’s a key player in your company's cash strategy.
