For startups, managing working capital effectively can mean the difference between scaling successfully and running into cash shortages. By aligning accounts payable (AP) and accounts receivable (AR) strategies, founders can maintain liquidity, optimize cash cycles, and support long-term growth.
Understanding Working Capital
Working capital measures how much liquidity a startup has to cover its short-term obligations. It is calculated as:
Current Assets: Cash, receivables, inventory
Current Liabilities: Payables, short-term loans, accrued expenses
Positive working capital ensures the business can meet obligations, while negative working capital signals potential liquidity risks.
The AR–AP Balance: Core to Working Capital
The working capital equation is largely influenced by how a startup manages:
Accounts Receivable (AR) – Money owed by customers
Inventory – Goods held before sale
Accounts Payable (AP) – Money owed to vendors
High AR days delay inflows.
High inventory days tie up cash.
Higher AP days extend liquidity.
The goal: shorten AR and inventory cycles while carefully stretching AP days without damaging supplier relationships.
The Working Capital Funding Gap
Startups often face a timing mismatch between customer receipts and supplier payments. This is measured by the funding gap:
A positive gap means cash is required to bridge the delay. A negative gap indicates suppliers are financing operations.
Example:
AR Days: 60
Inventory Days: 10
AP Days: 50
Funding Gap = (60 + 10) − 50 = 20 days of financing required.
Leveraging AR for Better Cash Flow
Automate Invoicing: Issue invoices promptly and accurately.
Offer Early Payment Incentives: Discounts encourage faster settlement.
Use Digital Payment Options: Simplify collections with online payments.
Set Clear Credit Policies: Minimize overdue balances with structured terms.
These actions reduce Days Sales Outstanding (DSO) and bring cash into the business faster.
Optimizing AP to Free Up Liquidity
Negotiate Longer Payment Terms: Extend Days Payable Outstanding (DPO).
Adopt Payment Scheduling: Pay invoices closer to due dates without incurring penalties.
Automate Approvals: Prevent delays in routing invoices for sign-off.
Build Vendor Trust: Consistent communication helps secure favorable terms.
Smart AP management allows startups to preserve cash for growth initiatives.
Key Metrics for Monitoring
Startups should consistently track these indicators:
DSO (Days Sales Outstanding) – Average time to collect receivables
DPO (Days Payable Outstanding) – Average time to pay vendors
DIO (Days Inventory Outstanding) – Time inventory is held before sale
Cash Conversion Cycle (CCC) = DSO + DIO − DPO
The shorter the CCC, the stronger the liquidity position.
Financing Tools to Bridge Gaps
Even with optimized AP and AR, startups may need external funding to cover gaps:
Invoice Factoring – Sell receivables for immediate cash.
Supply Chain Financing – Banks or fintech pay suppliers upfront while extending your payable timeline.
Venture Debt – Provides liquidity without diluting equity.
These tools extend runway during growth phases and help manage unpredictable cash flow.
Action Plan for Startups
Calculate current working capital and funding gap.
Reduce AR days with automation and disciplined credit policies.
Manage inventory turnover to avoid excess stock.
Extend AP days strategically through negotiations.
Track DSO, DPO, DIO, and CCC monthly.
Consider financing options when necessary.
Leverage automation tools to optimize AR and AP management.
Conclusion
For startups, working capital management is not just an accounting exercise—it is a survival strategy. By optimizing AR collections, carefully managing AP payments, and leveraging automation, startups can strengthen liquidity, reduce risk, and create the financial flexibility required to grow sustainably.