What working capital tells you
Working capital is current assets minus current liabilities — the cushion available to fund day-to-day operations. The companion current ratio (current assets ÷ current liabilities) normalizes it for size: below 1.0 means obligations due within a year exceed the assets available to meet them; most trade creditors want to see 1.2 or better, with the quick ratio confirming the cushion isn’t all inventory.
Why credit teams care twice
Working capital matters in both directions of a trade credit relationship. When you analyze a customer, their working capital position is one of the strongest short-horizon predictors of payment behavior — a customer with negative working capital pays late not because they want to, but because they must. When you look at your own balance sheet, receivables are usually the single largest current asset, which makes AR speed the fastest working-capital lever you control.
The DSO improvement math
The second panel computes daily credit sales × DSO days removed. A company with $9.6M of annual credit sales carries about $26,300 of AR for every day of DSO. Cutting DSO from 52 to 40 days releases roughly $316,000 of cash — once, but permanently — without borrowing a dollar. That released cash funds inventory, debt paydown, or growth, which is why DSO targets belong in treasury conversations, not just collections reviews.
For how to actually achieve the reduction, work through the DSO reduction playbook — the levers are ranked by return on effort.