Full Shelves, Empty Cash? How Longer Payment Terms Help Resolve Inventory Management Challenges

For many years, the guiding principle of efficient corporate management was to reduce inventories, minimize capital commitment, and deliver just-in-time. However, the reality of recent years has turned this model on its head. Geopolitical tensions, volatile commodity markets, and fragile supply chains have meant that security of supply now takes precedence over pure efficiency.

We are seeing the consequences of this among many of our customers: they are buying and producing for stock in order to remain able to deliver. Warehouses are therefore fuller than they have been for a long time. This is necessary from an operational point of view, but it leads to a massive dilemma from a financial perspective.

Reasons for the build-up of inventory: a changed market environment

CFOs and purchasing managers are confronted with a mixture of external shocks and strategic necessities. Three key factors can be identified that are currently leading to high inventory levels:

• Disruptions in supply chains: Disruptions are no longer the exception, but the rule. Whether it's low water levels in important shipping channels, port strikes, or geopolitical tensions blocking trade routes, the unpredictability of arrival times is forcing companies to build up massive safety stocks. Goods are not purchased when they are needed, but when they are available.
• Price volatility and inflation: In phases of volatile commodity prices, purchasing is becoming increasingly strategic. Goods are often procured early (“forward buying”) in order to secure price advantages or preempt announced price increases. While this trade-off protects future margins, it puts a strain on current liquidity.
• Increase in unfinished products: One factor that is often underestimated is the capital tied up in production. In the manufacturing industry in particular, we are seeing an increase in semi-finished goods (“work in progress”). Often, only individual components – such as microchips or special cable harnesses – are missing to complete a product. The result: almost finished machines or vehicles are sitting in the yard. They tie up almost their full value, but cannot be invoiced. This unwanted growth in inventory is particularly painful for cash flow.

The result is a classic dilemma for financial management: The question is no longer whether high inventories must be maintained, but how they can be financed intelligently without limiting the company's strategic ability to act.

The conflict: Operational necessity meets financial reality

High inventories mean tied-up liquidity. Goods that are sitting on the shelf or as semi-finished products in production do not generate any revenue, but must be pre-financed. The conflict of objectives: on the one hand, the operational business demands maximum security of supply in order to prevent production stoppages and loss of revenue. On the other hand, the finance department demands disciplined control of working capital.

This is because every euro tied up in inventory is not only unavailable for investments or repayments, it also worsens operational cash flow. CFOs are therefore faced with the task of financing high inventory levels without compromising the company's long-term financial flexibility. In the past, the answer was often to go to the company's bank. However, in the current market environment, traditional financing is increasingly reaching its limits. And alternatives involve a high level of administrative effort.

Why bank loans alone are not a strategy

Of course, bank loans and borrowing base lines remain pillars of corporate financing. However, traditional loans are often not the most efficient option for financing fluctuating inventories – not only for cost reasons, but above all for balance sheet structural considerations.

Balance sheet impact and debt ratio

A bank loan is reported as a financial liability on the balance sheet. Taking out loans to finance inventory thus directly increases the company's debt. This has a direct impact on important KPIs such as the leverage ratio or the equity ratio. However, increasing financial debt is often counterproductive for companies, as it has a negative impact on their creditworthiness or requires them to comply with covenants in their loan agreements.

The goal of a modern treasury is therefore to achieve a diversified financing mix. The aim is to find instruments that generate liquidity in operations themselves, rather than burdening the balance sheet with additional financial debt.

Leverage in working capital: gaining time

The most elegant solution to the inventory dilemma is not new loans, but optimization of the cash conversion cycle. If goods remain in storage longer and tie up capital, a balance must be created on the payment side: cash outflows to suppliers must be stretched out over time to close the liquidity gap.

For a long time, reverse factoring (supply chain finance) was considered the method of choice here. In practice, however, these programs often prove to be cumbersome and limited, even for very large corporations:

1. The onboarding hurdle: Reverse factoring requires a three-way agreement between the bank, the buyer, and the supplier. The effort required to convince suppliers to participate is enormous.
2. IT complexity: Traditional SCF programs often require complicated integration into the ERP system or the use of a platform, which takes time and resources.
3. Balance sheet risks: A critical issue for CFOs and auditors is the balance sheet classification. If payment terms are extended too aggressively, there is a risk under IFRS and HGB that trade payables will have to be reclassified as financial liabilities. This would negate the positive effect on the balance sheet structure.

The evolution: Supplier-independent working capital strategies

In view of these hurdles, treasury is moving away from supplier-dependent models toward autonomous solutions. The new motto is: The optimization of payment terms must be solely under the control of the purchasing company – independent of the supplier.

This approach decouples the payment flow to the supplier from the internal outflow of liquidity. The goal is to leverage the benefits of financing without introducing the complexity of external financing into the supply chain.

Solutions that follow this principle—such as cflox pay—address precisely this issue:

• 100% control: The CFO independently decides which liabilities are to be paid later. No approval or negotiation with the supplier is necessary. The supplier continues to receive their money on time from their customer. However, the company is only charged after an additional payment term has expired.
• Balance sheet clarity: Since the relationship with the supplier remains unchanged in operational terms, these solutions manage to maintain their character as an operating liability. This protects important KPIs such as the debt ratio.
• Speed instead of IT projects: While supply chain platforms often require deep ERP integrations, modern tools function as intelligent payment accounts. They can be implemented within a few weeks without months of IT projects, with immediate effect from the first payment run. For the CFO, this means that the solution is ready exactly when liquidity is needed to build up inventory.

So it is no longer a question of turning suppliers into financing partners, but of managing your own payment processing so intelligently that it acts like an internal line of financing, thereby promoting the financial performance of the company.

The key advantage for financial management lies in the “invisibility” of the solutions

The use of working capital solutions delivers benefits on several levels. For the company, this results in a triad of liquidity security, process stability, and improved results:

1. Strengthening free cash flow without debt: By extending actual cash outflows (e.g., by 60 days), capital remains in the company to cover high inventory levels. Since these solutions generally remain classified as operating liabilities, working capital is optimized without increasing net debt.
2. No disruption to operational purchasing: Perhaps the greatest operational advantage is the smoothness of the process. Neither the purchasing nor the accounting departments have to learn new procedures or involve suppliers. Since the supplier is paid on time, the company appears as a reliable partner. This strengthens the negotiating position in purchasing and secures the loyalty of suppliers in times of scarce goods.
3. Cash discount income: Profitability is an often underestimated lever. Since supplier invoices can be paid immediately, cash discount options can be systematically taken advantage of without having to use the company's own liquidity. This even achieves several effects: increased company profitability, strengthened suppliers through early payment, no cash outflow, and cost-neutral financing.

Conclusion: Resilience through a flexible financing mix

High inventory levels will remain the “new normal” as the price for stable delivery capability (just-in-case). For CFOs and treasurers, this means that financing these inventories is not a temporary measure, but a permanent strategic task.

Those who rely exclusively on rigid bank loans are depriving themselves of financial flexibility. The future belongs to intelligent financing mixes that combine bank lines with modern working capital instruments. Solutions that make payment terms more flexible without creating operational complexity give treasury departments exactly the strategic leeway they need in volatile markets.