Working Capital Management

Optimizing capital investments is one of the most important levers both for improving value-based performance indicators and for securing the availability of sufficient liquidity. In order to carry out measures to increase capital efficiency and install a system whereby it is permanently monitored, you must first have a comprehensive system for managing capital expenditure which also manages your investments, your finance and your working capital. In practice, however, it is very common that the potentials associated with an intelligent optimization of capital tie-up in inventories, in receivables, in liabilities and in liquid assets are often neglected or are not addressed systematically.

Surprising as this is, it becomes even more so when you look at the current benchmark study carried out by Horváth & Partners into raising capital efficiency, which found that companies still have over 25% of turnover tied up in working capital (net current assets). Alongside the primary target of raising capital efficiency, optimizing working capital can also enable companies to increase their ability to reach strategic targets. It is no coincidence that successful companies enjoy above average returns on capital investments, rather it is proof of the efficacy of systematic management and controlling of the working capital cycle. However, the question remains, how do companies actually go about reducing capital tie-up?

Effective working capital optimization should start with a specific quantitative and qualitative appraisal of the current state of working capital management within the company (small scale audit). This should provide clarity for all parties involved about which are the most important strategic and operative working capital drivers, what impact they have upon capital tie-up, cash flow and P&L, and which measures aimed at optimization can be implemented in the short term. An appraisal of the company’s working capital performance based upon long-term strategic goals and upon benchmarks from industry forms the basis for a further bottom-up analysis and for developing concrete working capital optimization measures. Key factors for success here are that all the departments are involved in all project phases and that the new management system is firmly anchored in the overall corporate management structure.