Working Capital Management in an Era of Volatility

Whatever the disruption (e.g., tariffs), better working capital management can mitigate your risk

Brexit, COVID, the cutoff of Russian gas and the blockage of the Suez Canal – European business leaders have been through a lot in the past decade. As they look ahead, many see more challenges to come. Whether the next disruption turns out to be extreme weather, gyrations in foreign exchange rates or most notably, the current U.S. administration’s tariff policy, the odds of a bumpy ride ahead seem high.

While your eventual response will depend on the precise nature of the disruption – or disruptions – there are several measures you can take now that will improve your ability to meet whatever challenge is down the road.

Check your dashboard

A good place to begin is to look at your own dashboard. Even before the year began, finance leaders were predicting a workload increase of 4.1% for 2025 – even as their staff and operating budgets shrank by 0.8%. More recently, surveys by The Hackett Group^® show that companies predict that financial, procurement, and supply chain planners and analysts may see their workload spike by 30% this year.

Should tariffs rise, some business strategists anticipate cash flow disruptions and slower payment for receivables. One common scenario is that price increases for U.S. customers reduce demand for European Union (EU) exports – even as cash-strapped U.S. buyers delay payments or demand longer credit terms.

Companies may also be tempted to stockpile inventory to avoid tariffs, increasing storage costs and tying up capital. Some firms may find themselves locked in a tug of war with their suppliers, trying to pay them later even as firms in higher-risk industries want to be paid sooner.

All these actions would result in lower profit margins and weaker demand, squeezing working capital and increasing the need for external financing. Overall, the profit margins that were already under pressure in 2024 could be even narrower this year, as new tariffs and other trade barriers leave EU firms faced with a choice of raising prices at the risk of curbing demand or reducing their own profitability by absorbing the additional costs.

Tighten working capital management practices

Next, you will want to reach for the financial equivalent of a seatbelt: tightening your working capital management practices.

The better you manage your working capital, the more capacity you will have to deal with whatever challenges lie ahead. Whatever happens to your suppliers or customers, the more disciplined your working capital practices, the safer your business is likely to be.  

There is some precedent for this: modern working capital management was born in another volatile economic era – the 1970s.

Faced with inflation, rising unemployment and spiking oil prices, many companies faced rising demands for liquidity that traditional accounting ratios had a hard time anticipating.

In 1974, Lawrence J. Gitman, a finance professor at San Diego State University, introduced the concept of the cash conversion cycle – a model that he argued made it easier for companies to estimate their liquidity needs at any given time. By combining the management of inventory, receivables and payables into a single metric, Gitman’s conversion cycle helped companies minimize their need for external financing and maximize their operational efficiency.

Three key steps

Five decades later, the working capital management model developed by Gitman and others remains an important defensive tool in volatile times – made even better thanks to some subsequent refinements. 

This time around, we suggest companies focus on three key metrics: days sales outstanding (DSO), days inventory outstanding (DIO) and days payable outstanding (DPO). Managing these three numbers can go a long way toward mitigating the risks you may face.

In particular, we recommend that you:

1. Improve your collections and customer-to-cash processes to reduce your DSO.
   DSO measures how long it takes a company to collect customer payments. If new tariffs increase product costs, customers may feel pressured to delay payments, increasing DSO, jeopardizing the steadiness of your receivables cash flow, and increasing the risk your customers will delay payment or not pay at all.
2. Enhance your inventory and forecast-to-fulfill  process to lower your DIO.
   DIO reflects how long inventory sits on the shelf unsold. If new tariffs lead companies to stockpile goods before price hikes take effect, more money stays tied up in warehouses, increasing the company’s vulnerability if demand falls due to higher prices. Trade volatility could challenge just-in-time supply chains, leading companies to stockpile inventory to avoid tariff hikes, leading to higher DIO, increased storage costs, and more capital tied up on warehouse shelves.
3. Extend your payables and improve your purchase-to-pay process to increase your DPO. 
   DPO indicates how long a company takes to pay its suppliers. This is a key measure of tension between companies and their vendors. In tough times, businesses will attempt to pay their suppliers later to offset their higher costs, while suppliers affected by an economic shock (such as a tariff) may demand earlier payments, forcing buyers to use more cash up front. The same dynamic could play out between companies trying to cope with tariffs because buyers may want to delay payments to preserve cash, while suppliers may demand faster payments, particularly in higher-risk industries such as aerospace, semiconductors and industrial manufacturing.

A new twist

However, although the basic plays are established corporate financial strategies, something important has changed in the last 50 years. In particular, finance teams in 2025 have an advantage they lacked in 1975: artificial intelligence (AI). Not only can AI assist finance teams in building resilience and agility, but it will also help them absorb the projected workload increases sparked by recent trade volatility. This is not just a matter of taking up the slack.

• For DSO reduction, finance teams can use predictive analytics to support the forecasting of late payments and credit terms. Firms can also leverage analytics to strengthen customer credit evaluations before offering extended terms. In addition, they can deploy AI agents to support automating and accelerating dispute resolution, using agents to support the expected workload increases from new queries and requests.  
• To lower DIO, you can deploy data-driven demand forecasting, which is again now powered by AI. You can also leverage advanced analytics and AI agents to identify alternative sourcing strategies using suppliers based in less volatile regions.
• DPO can also be extended with the help of advanced analytics and AI agents. These systems can assist in identifying and negotiating new or optimized payment terms, and in finding ways to extend payment terms without penalties.

Some of this may sound familiar. After all, many companies are already experimenting with AI. For example, a number of companies are now using AI agents to resolve disputes and improve self-service support on queries and status requests.

If you are one of those companies for whom AI remains in the experimental stage, it’s natural to face the temptation to stop experimenting until times begin to feel less volatile. This would be a mistake given the promise of the technology. While you need to proceed with care, you should try to take advantage of the ability of AI to enhance your reflexes as you navigate the turns ahead.

Ready to roll

Whether the next big disruption is driven by tariffs, extreme weather, foreign exchange volatility or something we aren’t even worrying about yet, the collective experience of European companies over the last decade suggests that you should be prepared for something extreme. Good working capital management can’t protect you against every potential bump that lies ahead, but it can help – particularly if you make AI part of your response.