Working Capital Management – Werthebel im Working Capital

Aktives Working Capital Management sichert die Liquiditätsausstattung durch effektiven Einsatz der verfügbaren Mittel und bietet große Chancen, um bestehende Werte zu heben. In diesem Artikel zeigen wir, wie sich Kapitalbindungs- und Geldumschlagsdauer eines Unternehmens bestimmen lassen und durch welche Maßnahmen diese positiv verändert werden können.

Die kurzfristige Kapitalbindung und Geldumschlagsdauer als Indikatoren zur Aufdeckung von Optimierungspotentialen im Working Capital

Im folgenden werden das Working Capital (WC) und der Cash Conversion Cycle (CCC) näher beleuchtet.

• The net working capital provides information about the short-term capital commitment of a company.
• The cash conversion cycle describes the duration between the first payment for the purchase of goods, through production, to the receipt of money by the customer for an order or a product.
• In order to determine the CCC and the period of capital commitment, the following KPIs must be taken into account: Days Sales Outstanding (DSO), Days Payable Outstanding (DPO) and Days Inventory Held (DIH).

If you have any questions on active working capital management, we are happy to advise. Get in touch using our contact form or arrange your first free appointment.

What is working capital management?

The net working capital provides information about the short-term capital commitment of a company

The net working capital is determined based on the sum of inventories and receivables less all short-term liabilities.

Net working capital = Inventories + receivables - short-term liabilities

If the net working capital is only considered in isolation, no absolute statement can be made about the liquidity of a company. However, it provides an indication of a company's potential solvency: If the net working capital is negative, this means that the current assets can be financed by the short-term liabilities.

A high net working capital might indicate an elevated short-term capital commitment. Possible causes may be e.g. a high stock of inventory or an increased number of receivables towards customers. In this case, the company's short-term liquidity position is reduced by the high net working capital. As a result, the liquidity term can be significantly shortened and the need for financing with debt or equity capital arise.

The consideration of net working capital is not suitable for comparing companies with one another. Depending on the business model, different levels of inventory are required, for example. The net working capital of a manufacturing company that stores inventories for production is usually higher than that of a software developer who does not need any inventories.

The Cash Conversion Cycle describes the time between the first payment for the purchase of goods, through production, to the receipt of money by the customer for a service or a product.

Um Aussagen darüber zu treffen, wie schnell Investitionen in Vorräte dem Unternehmen als Cash-Flow zukommen, messen wir das Net Working Capital in Relation zu den Umsätzen eines Unternehmens. Dies ist durch die Ermittlung des Cash Conversion Cycles, auch Geldumschlagsdauer genannt, möglich. Der Cash Conversion Cycle gibt die durchschnittliche Anzahl an Tagen an, die das Unternehmen benötigt, um Kapitalabflüsse für den Kauf von Vorräten in Kapitalzuflüsse aus seinen Forderungen aus Lieferungen und Leistung zu wandeln. Der Cash Conversion Cycle zeigt also auf, wie lange das Kapital eines Unternehmens in seinen Geschäften gebunden bleibt. Zur Berechnung des Cash Conversion Cycle ist die Bestimmung der folgenden drei Kennzahlen notwendig:

In the following, the key figures are determined for the period of one year (365 days), but a monthly, weekly etc. view is also possible. In this case, the corresponding values are used in the formula and multiplied by the corresponding time value (x30 for days, x7 for weeks).

Days Sales Outstanding (DSO): The average duration of incoming payments for deliverables and performance in days (see Fig. 1).

DSO = (Average Receivables / Sales) x 365 days

Days Payable Outstanding (DPO): the average time in days until outstanding debts are settled (see Fig. 1).

DPO = (Average Trade Payables / Total Purchases) x 365 days

Days Inventory Held (DIH): The average number of days that inventories are in the company from goods receipt to sale (see Fig. 1).

DIH = (Average inventory / cost of materials - other operating expenses) x 365 days

Figure 1

In order to determine the CCC and the period of capital commitment, the following KPIs must be taken into account: Days Sales Outstanding (DSO), Days Payable Outstanding (DPO) and Days Inventory Held (DIH).

Based on the key figures as shown above, the CCC can now be calculated as follows:

CCC = DIH + DSO – DPO

The shorter the CCC, the less bridging funding a company needs as it takes fewer days to convert an inventory investment back into cash through sales.

Even with the CCC, there is no comparability between companies because the individual key figures differ depending on the business activity and can therefore lead to very different results. Within an industry, however, the CCC can be used as a benchmark for the efficiency of capital commitment.

In case the net working capital and cash conversion cycle indicate a high capital commitment, there might be a need for action taken in warehousing or the management of receivables and payables. Companies with comparable supply and value chains may be used as a benchmark.

Gut zu wissen: Der Working Capital Cycle (WCC) ist der Geldbetrag, den Sie benötigen, um das Unternehmen zahlungsfähig zu halten.

Als nächstes beleuchten wir die einzelnen Kennzahlen des Cash Conversion Cycle näher. Außerdem zeigen wir Maßnahmen zur Optimierung des CCC sowie des Net Working Capital auf.

Aktives Management von Forderungen und Verbindlichkeiten zur Erhöhung der Liquidität

Noch einmal das wichtigste zusammengefasst:

• "Net Working Capital” provides information on the short-term capital commitment of a company.
• The Cash Conversion Cycle (CCC) represents the average number of days it takes the company to convert capital outflows for purchasing stock items into capital inflows from trade accounts receivable.
• Der DIO (Days Inventory Outstanding) misst die Anzahl der Tage, in denen die Vorräte unverkauft bleiben. Mit anderen Worten, sie gibt an, wie lange ein Unternehmen braucht, um seine Vorräte in Bargeld umzuwandeln.
• The CCC is calculated as follows: CCC = DIO + DSO – DPO.

Der folgende Abschnitt gibt Aufschluss über das aktive Management von Forderungen und Verbindlichkeiten zur Liquiditätserhöhung:

• If the average collection period is less than the range of liabilities, a company can settle the liabilities using the payments made by the customers.
• Improving the invoicing process as well as the dunning system help to track and actively manage payment terms, and in this way, to increase available liquidity.
• Active management of the accounts payable may extend the term of liabilities and increase the company's liquidity.

If you have any questions on active working capital management, we are happy to advise. Get in touch using our contact form or arrange your first free appointment.

If the average collection period is less than the range of liabilities, a company can settle the liabilities using the payments made by the customers.

The term "Days Sales Outstanding" (DSO) refers to the number of days that elapse between the time of invoicing and receipt of payment in the bank account. A quick settlement of the receivables and thus a low DSO have a positive effect on the liquidity of a company (cf. Fig. 1), whereas a high DSO implies slow payment of the customer's invoices.

The figure “Days Payable Outstanding” (DPO) indicates the time a company needs on average to settle its trade accounts payable (see Fig. 1). From the working capital point of view, a high DPO reflects a lower capital commitment and thus more available liquidity.

If the DSO is less than the DPO, the company can settle the liabilities with the payments from the customers. Otherwise, the company must pre-finance the repayment of liabilities using its own liquidity or through loans, which can result in liquidity bottlenecks. These bottlenecks can be counteracted by optimizing business processes related to the DSO and DPO.

Figure 1

Improving invoicing and dunning can increase a company's liquidity

By means of an active management of receivables, it is possible to shorten the DSO and thus improve a company's liquidity situation.

Measures to optimize the DSO are:

• (Re) negotiation of payment terms: Payment terms can be renegotiated with existing customers. With new customers, attention should be paid to the shortest possible payment term right from the start. In order to create an incentive for customers to pay invoices promptly, a discount can be granted.
• Prompt invoicing: If the invoice is issued immediately after the service has been provided, the company favors receipt of payment as early as possible. Software solutions can help to optimize the invoicing process and to ensure automatic tracking of the payment periods.
• Active dunning: If, in addition to prompt invoicing, attention is also paid to regular checking of the punctuality of incoming payments, payment delays are noticed immediately and can be resolved directly.

Active management of the accounts payable may increase the company's liquidity.

Increasing the DPO also releases liquidity. Measures to increase the DPO are:

• (Re) negotiation of payment terms: With new contracts, care should be taken from the start to agree payment terms that are as long as possible. If necessary, it is also possible to renegotiate existing contracts with the contractual partners. A compromise with regard to the purchase price or other contractual points can strengthen your own negotiating position in order to stretch the payment period. 
• Maxing out the payment terms: In order to keep means of payment in the company for a long time, invoices should be paid as late as possible. However, care should be taken to ensure that the relationship with suppliers / creditors is not negatively affected by stretching the payment term.

Active management of receivables and liabilities can reduce a company's capital commitment and liquidity requirements.

Durch aktives Vorratsmanagement die Kapitalbindung steuern

Hier noch einmal die wichtigsten bisherigen Inhalte zusammengefasst:

• The net working capital provides information about the short-term capital commitment of a company.
• "Cash Conversion Cycle" (CCC) represents the average number of days it takes the company to convert capital outflows for purchasing stock items into capital inflows from trade accounts receivable.
• Liquidity can be positively influenced by active management of receivables and payables.

If you have any questions on active working capital management, we are happy to advise. Get in touch using our contact form or arrange your first free appointment.

The Days Inventory Held (DIH) key figure can be used to analyze the capital tied up in inventories

DIH indicates the average number of days that pass between the receipt and issue of inventories. The smaller the DIH, the less capital is tied up in a company's inventories. Low DIH can be an indicator that inventory is managed more efficiently and that there is a correspondingly low storage duration. However, in periods of high demand, a too low inventory level may risk that customers cannot be served, which is why inventory management must also take into account a sufficient buffer for possible additional orders. Inventory levels cannot be considered in isolation, but in the context of the business model or industry, as different business models require different inventory levels. Reasons for a high inventory level can be a consequence of an usually advantageous bulk purchasing as well as ensuring the availability of raw materials.

Figure 1

Inventory reduction helps to decrease the amount of capital tied up

Measures that can reduce inventories and positively influence liquidity are:

• Analyzing and reducing inventories: Analyzing inventories, taking into account internal production and logistics processes as well as industry and seasonal peculiarities, provides clarity on the level of inventory required.
• Setting up direct inventory planning: Inventory planning can be set up on the basis of an analysis of warehouse lead times, inventory turnover rates and order lead times. Based on planned orders, times and quantities for required stock orders can be determined.
• Optimization of purchasing processes and production processes: Adjusting ordering processes to production can lead to more efficient inventory management in the long term. In addition, optimizing production and logistics processes can reduce lead times and thus reduce excess inventory.

Durch eine Verkürzung der Kapitalbindungsdauer kann Liquidität im Unternehmen freigesetzt werden.  Eine aktive Bestandsplanung nahe am tatsächlichen Bedarf kann dabei helfen, den Anteil des gebundenen Kapitals langfristig niedrig zu halten

At Trustventure, we advise young companies on financial issues and offer CFO-As-A-Service. Our expertise in questions of corporate finance, planning and controlling creates transparency and security for you and your investors. Get in touch using our contact form or send us an email via office@trustventure.de.