The imperative of effective Net Working Capital Management

In addition to the uncertainties stemming from geopolitical crises, supply chain challenges, and the evolving landscape of automation and artificial intelligence, companies are grappling with the impact of rising interest rates on corporate financing. In navigating these dynamic changes, effective net working capital management emerges as a pivotal factor in ensuring the availability of liquidity for strategic investments, including ventures into new products, expansion, or transformative initiatives.

Navigating geopolitical uncertainties, supply chain disruptions, and rising interest rates

Based on the cash conversion cycle, every facet of operational management is influenced, demanding a comprehensive optimization strategy. Thereby, three key success factors determine the success of designing such a strategy within a swift timeframe.

  1. Efficient data preparation and visualization 
    Often the required data for a holistic Net Working Capital (NWC) analysis such as payment dates, stock levels over time or agreed payment terms is documented in various data sources. The consolidation into one standardized and well-prepared data set is therefore fundamental. Furthermore, the resulting data set needs to be systematically structured to analyze by setting up a transparent, adjustable and insightful visualization. 
  2. Challenge results against internal and external benchmarks 
    To conduct a well-founded assessment of the status quo performance in the NWC dimensions, benchmarks are the way to go. Internal benchmarks are a convenient way to identify best practices already present within the own organization but may be limited in their positioning. However, external benchmarks among the clearly defined peer group provide the most valuable insights into areas for improvement and are key to identifying the most beneficial optimization measures. 
  3. Create buy-in of entire organization for sustainable value creation 
    To successfully implement improvement measures, various stakeholders also outside from the accounting division such as the procurement experts, key account managers or supply chain managers need to be closely aligned. Therefore, defining clear responsibilities and timelines for all measures is equally important as communicating the importance and benefits of a proactive NWC management into the organization.  

We observe that many of our clients can enhance their NWC performance in a sustainable manner by adhering to these success factors. A notable example is a DAX 40 company, which was able to identify a significant NWC potential, with an initial implementation phase resulting in the release of several hundred million euro in cash.

Study reveals five Net Working Capital Management trends

It is also crucial to continually evaluate and refine NWC strategies and measures. That's why we conducted our NWC study for 2024, with over 100 companies participating. This comprehensive study promises to yield valuable insights into emerging trends, best practices, and areas for improvement in NWC management. For a sneak peek, here are the top five findings from the study at a glance: 

  • Importance of cash reserves: The study underscores the critical role of cash reserves in ensuring a company's preparedness for future challenges and opportunities. 

  • Top management priority: Efficient management of net working capital emerges as a top concern for senior executives, reflecting its impact on overall financial health and sustainability. 

  • Limited adoption: Surprisingly, our research shows that only a minority of surveyed companies have initiated consistent efforts to improve their NWC, highlighting a potential area for improvement across industries. 

  • Inconsistent results: While a significant portion of companies claim to have implemented measures to optimize NWC, the study reveals a disparity in results, with only a fraction experiencing sustained positive effects. 

  • Correlation with success: Notably, companies actively engaged in NWC management tend to outperform their peers, suggesting a strong correlation between proactive NWC strategies and overall business success. 

Stay tuned for the upcoming release of our comprehensive NWC study report in the coming weeks. Let's work together to equip businesses with the tools they need to weather uncertainty, seize opportunities, and forge a path toward financial resilience and success. 

Diemer, P. / Dolling, A. / Kröber, J. / Linß, A. / Nowak, A. / Sennhenn, P.