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Increase liquidity with working capital management
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Working capital management
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Optimise liquidity with working capital management

According to a study by the DIHK, 40% of German companies are struggling with liquidity bottlenecks in the current coronavirus crisis. In order to survive the crisis (as well as possible), securing their own cash liquidity is currently the top priority for many companies. To this end, expenditure (cash outflow) is being reduced to a necessary minimum, while cash inflows (collecting outstanding receivables, increasing sales) are being maximized.

Another way to improve liquidity in the company is to release capital tied up in the company. The search for potential to release tied-up capital is forcing companies to put the issue of working capital management back at the top of the agenda.

Importance and objectives of working capital management

What is working capital?

The term working capital is initially a balance sheet indicator that provides information about a company's liquidity . In German, it can best be translated as net current assets . Put simply, working capital stands for the amount of capital to which the company is entitled, but to which it (usually) does not have immediate access.

Examples of working capital include high stock levels or unpaid invoices from customers.

Low (but still positive) working capital therefore means that the company has little capital tied up and is successfully managing its liquidity.

A company's working capital can be calculated as follows:

Working Capital Management - Calculation

In addition to the direct economic impact on companies, the current coronavirus crisis is also accelerating the developments already initiated by digitalization. Business processes, both within the company and throughout the market, among customers and competitors, are constantly accelerating and changing. This increasing dynamism makes it more and more difficult to make investments with a long-term time horizon (e.g. in long-term projects, real estate investments, expensive machinery or equipment), as the long-term benefits and return are much harder to predict. As a result, these investments are no longer justified. The uncertainty for the company increases.

In order to survive crisis situations and to be able to react quickly and efficiently in an increasingly competitive market and competitive environment, it is essential to have sufficient liquid funds. Working capital management is a tool for increasing liquidity and improving the company's profitability. The focus here is on optimizing all financial flows - both within the company and between the company and its business partners.

A key aspect of WCM is the cash conversion cycle (CCC). The CCC describes the processes starting with the investment in the manufacture of products, through the storage or further processing of the products, the sale and the inflow of liquid funds through the sale. From this analysis, insights can be gained into the cash turnover period, i.e. the duration of capital commitment in the company, and optimization potential can be derived. The lower the cash turnover period, the sooner the company has liquid funds.

Reduce working capital in the company

Reduce the duration of storage 

Reduce the duration of your stockholding. The aim should be to hold as little stock as possible. Optimization potential lies above all in reducing throughput times, for example in relation to incoming and outgoing goods or transport routes, as well as minimizing safety stocks.

Reduce amounts of outstanding payments (receivables)

  1. Optimize receivables management: Check how many of your customers' invoices have not yet been paid and push for these items to be settled.
  2. Shorten payment terms: Shorten the payment terms for your invoices. Ensure that specific payment targets are specified in future (number of days until the due date after receipt of the invoice).
  3. Selling receivables (factoring): Selling outstanding receivables (e.g. invoices that the customer still has to pay) to a factoring provider. The provider settles the outstanding receivable immediately, usually at a discount, so that the company can put money directly into its own coffers.
  4. Customize payment terms: Where possible, offer your customers additional payment methods, e.g. down payments, prepayment or alternative, digital payment options. In this way, some of the receivables flow back into the company earlier.

Postpone payment of supplier invoices (liabilities)

  1. Extend payment terms: Agree longer payment terms with your suppliers. In concrete terms, this means that you postpone payment of your supplier invoice for as long as possible. In some industries, it is accepted that you only pay your suppliers once the purchased goods have generated the corresponding turnover.
  2. Bonus & malus agreements: For long-term supplier relationships, try to negotiate bonuses in advance ("rebate"). Based on the expected turnover for a year, the supplier makes an advance payment and grants a discount that is repaid if a certain turnover threshold is not reached.

A reduction in working capital can also be achieved by avoiding investments and fixed costs. This protects cash flow and increases financial flexibility. Different approaches can also be used for this, for example:

Outsourcing

Outsource projects and activities that are not necessarily related to your company's core business to external partners. This allows capacities to be ramped up or down very quickly. Service provider contracts can also be cleverly restructured, e.g. through revenue sharing or by setting up a cost-plus model.

Replace CapEx with OpEx

  1. Capital expenditure (CapEx) refers to investments where the entire sum for the purchase of a product is paid in advance. Depending on the investment (e.g. real estate, office equipment), this can be very expensive. Operating expenses (OpEx) refer to expenses that are necessary for the ongoing operation of a company. As a rule, these are paid monthly or annually (e.g. in the form of rent or leasing).
    Although CapEx can make sense in some cases, OpEx is more advantageous for many reasons:
  1. Lower capital expenditure, which conserves capital and increases liquidity. Use the freed-up capital to further develop your company and your business model instead of tying it up elsewhere.
  2. Significantly more flexibility for the company to manage as required. Long-term planning is becoming increasingly difficult and OpEx - unlike CapEx - can be ramped up or down at any time.
  3. All expenses are 100% tax deductible.
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Download: From CapEx to OpEx

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Example of office equipment

Office equipment is a classic example of how high investment costs can be avoided. Buying office equipment is usually associated with high acquisition costs. Renting office equipment or technology is a flexible alternative that many companies are already making use of. This is because instead of high one-off payments, only low monthly rental installments are paid, which puts less strain on cash flow. The following calculation example illustrates this. 

A company would like to procure new workstations for its 50 employees, consisting of a desk, an ergonomic office chair and a high-performance laptop

Purchase of office equipment: The company pays around EUR 3,700 per workstation when purchasing office equipment. This means an initial payment of 185,000 euros. 

Renting office equipment: Alternatively, the company can also rent the products and spread the costs over the rental period. In this case, each employee only has to pay 105 euros per month.

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Effective working capital management has numerous financial and operational advantages. In particular, increasing global competition and not least the special challenges in times of crisis make a company's ability to act financially imperative. Optimizing working capital is a cost-effective and sustainable way of financing a company and securing its liquidity. 

As a professional rental company for office equipment, Lendis helps you to flexibly furnish your office with furniture and electronics without putting too much strain on your cash flow. We are always on hand to advise you. We are also happy to support you in planning your office.