How Zara, Fortum, and smart CFOs win the liquidity game
Oct 14
3 min read
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The phrase “Cash is the King” entered the business vocabulary after the liquidity crisis of the 1980s. It’s often attributed to Volvo’s CEO, Pehr G. Gyllenhammar (1988), who used it when commenting on the aftermath of the 1987 stock market crash.
This phrase — and the experience behind it — highlights a simple truth: cash is the most important asset a company has.
Businesses with strong liquidity reserves are the ones that not only survive difficult times but come out stronger.
As my economics professor once said:
“A crisis is the ultimate test of a company’s resilience and the quality of its management.”
And indeed, the more effectively a company manages its cash, the more room it has to grow, invest, and reduce risk — strengthening its long-term position.
From Liquidity to Working Capital
Liquidity management begins with controlling cash flow, but financial resilience comes from how effectively a company manages its working capital.
Working capital is the lifeblood of business operations — it reflects how efficiently a company turns its assets into cash.
The Operating Cycle — The Heart of Cash Flow
The cash conversion cycle starts with purchasing raw materials (inventory) and paying suppliers (accounts payable), continues through production and sales (inventory turnover), and ends when the customer payment is collected (accounts receivable).
This journey — from purchase to payment — defines the operating cycle.
Example:
Supplier payment: 30 days after delivery (payables)
Production cycle: 45 days
Customer payment term: 20 days (receivables)
Operating cycle = 45 + 20 – 30 = 35 days
During this period, the company faces a cash gap (working capital funding gap).
Multiplying the average daily cost of goods sold by the cycle length helps estimate the cash requirement to fund operations.
The goal is to shorten this cycle as much as possible — or even make it negative, as Zara has done.
The Zara Model: When Customers Finance the Business
Zara (Inditex Group) is a classic example of strategic liquidity management.
The company operates with a negative cash conversion cycle, allowing it to finance its growth through customers and suppliers.
Here’s how it works:
Zara receives cash immediately — at the point of sale in stores or online.
Meanwhile, supplier payments are made 60–90 days after delivery of fabrics, accessories, and finished products. The time from design to store shelf is just 3–4 weeks, and inventory turnover is among the highest in the industry.
The result — a negative operating cycle: Zara collects money before it pays its suppliers. This is more than financial discipline — it’s a liquidity-driven business model, where cash flow is built into the strategy itself.
How to Shorten the Cycle and Strengthen Liquidity
1. Accounts Payable
The longer you defer payments (without breaking trust), the better for your cash flow.
Negotiate longer payment terms with suppliers.
Use installments, split payments, or corporate cards.
One of my clients, for example, secured a supplier credit limit covering 70% of the invoice, payable 1.5 months after delivery, while the remaining 30% rolled into the next period.
This approach preserves liquidity and builds trust — especially valuable during volatile periods.
2. Accounts Receivable
The sooner you collect, the stronger your cash position.
Issue invoices immediately after delivery.
Offer discounts for early payment.
Ask for prepayments or deposits.
Maintain strict credit limits.
Track overdue accounts in real time.
Example: Finnish energy provider Fortum invoices customers on the 10th day of the current month, with payment due by the 24th.
Customers haven’t even used the electricity yet, but the payment is already in the system. The result — a negative cash conversion cycle.
Fortum uses predictive analytics to forecast consumption and prices, achieving an impressive 5–7% variance that is later adjusted in future settlements.
3. Inventory
The faster inventory turns into finished goods — the healthier your liquidity.
Apply Just-in-Time (JIT) principles.
Optimize purchasing: better discounts, delivery terms, and order timing.
Reduce production lead time.
Enable seamless data flow between procurement, production, and sales.
Inventory optimization drives lean production and eliminates waste across operations.
The Final Touch — Automation and Standardization
To make cash flow smoothly and predictably:
Automate billing, invoicing, and payment reminders.
Offer multiple, convenient payment options.
Centralize customer and supplier data.
Standardize payment terms and approval policies.
Once cash is received, consider using cash pooling (especially in group structures) to manage liquidity centrally.
Excess funds can be placed in short- and medium-term deposits, balancing yield and flexibility.
To sum up:
Liquidity management is the art of turning operational processes into cash flow.
Working capital management is the discipline that keeps your business agile, resilient, and ready for growth.
As Zara and Fortum show — the winners are those who don’t just manage profits, but master the timing of money itself.
