Optimise liquidity with working capital management
According to a study by the DIHK, 40% of German companies say they are struggling with liquidity bottlenecks in the current corona crisis. In order to survive the crisis (as well as possible), securing their own cash liquidity is currently the top priority for many companies. For this purpose, expenditures (cash outflow) are reduced to a necessary minimum on the one hand, while on the other hand cash inflows (collection of open receivables, increase in sales) are maximised.
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 topic of working capital management back at the top of the agenda.
Importance and goals of working capital management
What is working capital?
The term working capital is first and foremost a balance sheet indicator that provides information about the liquidity of a company . In German, it can best be translated as net working capital. 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 inventories or unpaid invoices from customers.
A low (but still positive) working capital therefore means that the company has little capital tied up and is successfully managing its liquidity.
The working capital of a company can be determined as follows:
In addition to the direct economic impact on companies, the current Corona crisis is also accelerating the developments already set in motion by digitalisation. Business processes, both in the company and in the entire market, among customers and competitors, are continuously 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 benefit and return are much more difficult 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, the provision of sufficient liquid funds is essential. With working capital management, an instrument is available to increase liquidity and improve the profitability of the company. The focus is on optimising all financial flows - both within the company and between the company and its business partners.
An essential aspect of WCM is the so-called cash conversion cycle (CCC). The CCC describes the processes beginning with the investment in the manufacture of products, through the storage or further processing of the products, the sale and finally the inflow of liquid funds through the sale. From this observation, insights into the cash turnover period, i.e. the length of time capital is tied up in the company, can be gained and optimisation potential derived. The shorter the cash turnover period, the more likely the company is to have liquid funds.
Reduce working capital in the company
Reduce duration of storage
Reduce the length of time you hold inventory. The goal should be to hold as little inventory as possible. Optimization potential lies primarily in reducing throughput times, for example in terms of goods receipt and goods issue or transport routes, and minimizing safety stock to the minimum.
Reduce amounts of outstanding payments (receivables)
- Optimise receivables management: Check how many of your customers' invoices are still unpaid and push for the settlement of these items.
- Shortenpayment terms: Shorten the payment terms in your invoicing. Make sure that concrete payment terms are given in the future (number of days until the due date after receipt of the invoice).
- Selling receivables (factoring): Se lling outstanding receivables (e.g. invoices that the customer still has to pay) to a factoring provider. This provider settles the outstanding debt immediately, usually for a discount, so that the company can directly put money into its own coffers.
- Adapt payment terms: If possible, offer your customers additional payment methods, e.g. deposits, prepayment or alternative, digital payment options. In this way, parts of the receivables flow back into the company earlier.
Push back payment of supplier invoices (payables)
- Extend payment terms: Agree on longer payment terms with your suppliers. In concrete terms, this means that you postpone paying your suppliers' invoices as long as possible. In some industries it is even accepted that you only pay your suppliers when the purchased goods have generated the corresponding turnover.
- Bonus & malus agreements: In 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 rebate that is paid back if a certain turnover threshold is not reached.
A reduction in working capital can also be achieved by avoiding investments and fixed costs. This conserves 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 the core business of your company to external partners. This allows capacities to be increased or decreased very quickly. Service provider contracts can also be cleverly restructured, e.g. by revenue sharing or setting up a cost-plus model.
Replace CapEx with OpEx
- Capital expenditures (CapEx) refer to investments where you pay the full amount upfront for the purchase of a product. Depending on the investment (e.g. real estate, office equipment), this can be very expensive. Operating expenses (OpEx) refer to those expenses that are necessary for the ongoing operation of a business. Usually, these are paid monthly or annually (e.g., in the form of a rent or lease).
Although CapEx can be useful in some cases, OpEx are more advantageous for many reasons:
- Lower capital expenditure, which preserves capital and increases liquidity. Use the freed-up capital to further develop your company and your business model instead of tying it up elsewhere.
- Significantly more flexibility for the company to manage as needed. Long-term planning is becoming increasingly difficult and OpEx - unlike CapEx - can be ramped down or up at any time.
- All expenses are 100% tax deductible.
Download: From CapEx to OpEx
Example office equipment
A classic example of how high investment costs can be avoided is in the area of office equipment. The purchase of office equipment is usually associated with high acquisition costs. Renting office equipment or technology is a flexible alternative that many companies already make use of. Instead of high one-off payments, only small monthly rental instalments are made, which puts less strain on cash flow. The following calculation example illustrates this.
A company wants to procure new workstations for its 50 employees, consisting of a desk, an ergonomic office chair and a powerful laptop .
Purchase of office equipment: The company pays approx. 3,700 euros per workplace for the purchase of office equipment. Thus, an initial amount of 185,000 euros is to be paid.
Renting office equipment: Alternatively, the company can also rent the products and spread the costs over the rental period. In this case, only 105 euros per employee are to be paid monthly.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.
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 financial capacity to act imperative. The optimisation of working capital represents a favourable and sustainable way of corporate financing and, above that, securing liquidity.
As a professional office equipment rental company, Lendis helps you to flexibly furnish your office with furniture and electronics without putting too much strain on your cash flow. We are always there to advise you. We are also happy to support you in planning your office.