Working Capital

Streamlining working capital increases liquidity, reduces interest expenses and improves key figures.

Working capital can be defined by the efficiency of a company and its short-term financial health. Positive working capital means that the company is theoretically able to pay its current liabilities. However, this is subject to the condition that sufficient liquidity is available. Negative working capital means the opposite.

Current assets - current capital = working capital

Whereby only the working assets and capital are meant, which does not include, for example, items such as orders not yet invoiced and any excessively low valuations of inventories and receivables should also be taken into account.

Terms, Key Performance Indicators

• Days Sales Outstanding (DSO): Difference in days between invoicing and customer payment
  
• Days Payable Outstanding (DPO): Difference in days between invoice date and supplier payment
  
• Days Inventory Outstanding (DIO): Difference in days between the supplier invoice date for a specific item and the seller invoice date. (Not the physical receipt or issue of the item, as this does not yet have a cash effect -> be careful with any accruals)
  
• Days Working Capital (DWC) - Number of days it takes to transfer working capital into revenue. Also called “cash days”
  

Calculation method

1. Direct method: DSO - DPO + DIO = DWC
   
2. Indirect method: (WC[t2] - WC[t2] x 365 ) / annual sales = DWC
   

Example

Assuming a cost of capital of 8% p.a., these key figures have the following financial impact: DSO: 34'800.- DIO: 6'666.67 DPO: -12'000.- This results in total costs of 29'466.67. Depending on other framework conditions, these costs also have a significant impact on immediate liquidity. The parameters for optimization are accounts receivable, accounts payable and, above all, inventory turnover. A strategic approach is advisable for sustainable success. This means, for example, not simply asking customers and suppliers for understanding by shortening the payment period for customers and extending the payment period for suppliers, but rather optimizing from the inside out and in clusters. This is the only way to implement optimization profitably.

Although working capital is by definition the short-term part of the balance sheet (see above), it is also controlled by long-term items. Short-term: Operational processes (purchasing, sales, payment). Long-term: transactions affecting liquidity such as the sale of fixed assets, repayment of long-term debt, changes in equity in the share capital. In order to manage working capital processes satisfactorily, all balance sheet items should therefore be examined and analyzed for their possible effects.