Working Capital / Tied Capital
Leaning of working capital processes reduce interest expenses,
release capital and improve key figures!
Working Capital may be defined by efficiency of a company and their shortterm
financial health. A positive working capital means that a company is theoretically
able to pay the shortterm liabilities. Nevertheless, with the requirement that
sufficient liquidity is available. Negative working capital means the respective
opposite.
Short Term Assets - Short Term Liabilities = Working Capital
(whereas short-term means with a remaining maturity of less than a year)
Terms, Key Performance Indicators
•
Days Sales Outstanding (DSO): Difference in days between invoice date and customer payment
•
Days Payable Outstanding (DPO): Difference in days between supplier invoice date and payment to supplier
•
Days Inventory Outstanding (DIO): Difference in days between invoice date of the supplier and the invoice to the customer for a specific good.
(Because the cash impact is not counting with the physical entry- or exit of the good in the warehouse. It is the invoice date of the supplier
invoice resp. invoice to the customer -> be aware of accruals!)
•
Days Working Capital (DWC) - Days, how long it needs to convert working capital in revenue. Also called “Cash Days”.
Calculation
1.
Direct Method: DSO - DPO + DIO = DWC
2.
Indirect Method: (WC[t2] - WC[t2] x 365 ) / Yearly Turnover = DWC
Example
With an assumed capital cost ratio of 8% the kpi’s of working capital
have these results:
DSO: 34'800.-
DIO: 6'666.67
DPO: -12'000.-
That equeals total costs of 29’466.67. Depending on further
circumstances these costs have also a direct impat to the liquidity.
The triggers for an optimization or trade receivables, trade payables
and mainly inventory turnover. For a sustainable success it is
mandatory to act strategic. That means, not just begging customers
for faster paymen or vendors for later payment. More from inside to
outside and thinking in clusters. Just this way a winning achievement
is possible. Are you interested how much your working capital cost and how much funds are locked? You will be surprised! Click here, in the
download area is a free excel tool to calculate those numbers.
Key Elements for Working Capital Management
•
Improvement of working capital unlocks frozen liquid funds, increase the free cash flow and reduce the inventory- and capital costs. (n.b. Free
Cash Flow = [Operating Cash Flow] + [Investment Cash Flow])
•
Consciously improvement of working capital processes release in average 20% - 30% tight capital.
•
The value of the company increase by re-investing the released funds. In consqueence the turnover rise what will lead to a better operational
cash flow by sametime reducing capital costs (same conditions assumed)
•
Working Capital is also an indicator for an upcoming crisis. If working capital rise faster than the turnover it means that more capital must have
been used that is at the end of the day just locked in operational processes. About three years before a liquidity crisis the ratio of [WC] /
[Balance Sheet Total] increase clearly.
Managing Working Capital
Working Capital is per definition the short term part of a general ledger (see above). But it will be managed also by long term driven positions. Short
Term: operational processes (Purchase, Sales, Payments). Long Term: liquidity effective procedures like the disposal of fixed assets for cash or
repayment of long term liabilities and also change in equity for capital fund.
Approach for Improvment
A) Vendors
Don’t
•
Don’t start to extend payments to suppliers - at the end the end the customer is paying.
•
Especially key-vendors are essential. If those vendors stop to deliver, you are unable to produce anything.
•
Reminders for late payment, evil calls or bad credit-worthiness are the consequences.
•
Among troubles, what costs also time and money, you will enter into a risk to get worse conditions for existing and new vendors and certainly
also banks.
Instead
•
Prioritize verndors and segregate them for todays and future deliveries as well as for financial processes.
•
Rate your vendors individually, i.e. for readiness for deliver, quality of the deliveries, financial health, conditions. How vendors can be ratet is
part of our article in our news-corner here as an example for banks..
•
At least yearly negotiations with vendors. Time for personal meetings are well invested, instead just simple letters like: “beginning with next
month, we pay your invoices 4 days later”.
Read also our article about vendor management here.
B) Inventory
Don’t
•
Reduction of a safety stock can cost much more as it seems to be on a paper.
•
The consequences start with higher delivery costs, because a lower stock increase the number of orders per cycle. Higher prices arise in the
following because of scale-effects and also potential dissatisfaction of customers need to be considered because they don’t get their products
in the right time.
•
Impacts on turnover based incentives for the sales staff and the management may lead to troubles up to resignation and dismissals.
Instead
•
Deversify between semi-finished goods and finished goods. Semi-finished goods have an impact to the producution and have therefore just
indirect impact to the satisfaction of customers. Finished goods have an ultimate direct impact to the customers and therefore to the turnover.
•
Distinguish for goods with high, middle and low inventory turnover.
•
All goods should be compared by supplier in a matrix and clustered for the ideal lot size. See also our excel tool to calculate the ideal lot-size
by Andler for free download in our download area.
C) Customers
Don’t
•
Don’t dictate from one day to the other new payment terms. In the best case the customers ignore the new terms, but then nothing is
achieved. In the worst case customers quit the friendship.
•
Every customer is individual. Thus, don’t measure all customers with the same objectves.
•
Don’t think that customers stay because the product might a good one.
•
Don’t assume that a customer stays always the same.
Instead
•
Differentiate large and small customers as well as good and poor payer.
•
Have an interest for the customers of your customer in order to find out what those 2nd line customers request and how they behave. Thereby
you have a good basis for individual negotiations. Afterwards you are in a much better position to discuss more favourite payment and
delivery terms.
•
Be consequent with bad payer. Urge them max. twice and go then further with legal actions. Because it is much wiser to waive turnover as to
spend the products for nothing! Just alone with turnover on nice sheets nobody can pay their liabilities. That’s also the reason why turnover is
quite a bad kpi for incentives.
Read more about Working Capital in our article “Working Capital as Barometer of Effencieny”.
Contact us, we would be glad to show you the possible opportunities!
financial health. A positive working capital means that a company is theoretically
able to pay the shortterm liabilities. Nevertheless, with the requirement that
sufficient liquidity is available. Negative working capital means the respective
opposite.
Short Term Assets - Short Term Liabilities = Working Capital
(whereas short-term means with a remaining maturity of less than a year)
Terms, Key Performance Indicators
•
Days Sales Outstanding (DSO): Difference in days between invoice date and customer payment
•
Days Payable Outstanding (DPO): Difference in days between supplier invoice date and payment to supplier
•
Days Inventory Outstanding (DIO): Difference in days between invoice date of the supplier and the invoice to the customer for a specific good.
(Because the cash impact is not counting with the physical entry- or exit of the good in the warehouse. It is the invoice date of the supplier
invoice resp. invoice to the customer -> be aware of accruals!)
•
Days Working Capital (DWC) - Days, how long it needs to convert working capital in revenue. Also called “Cash Days”.
Calculation
1.
Direct Method: DSO - DPO + DIO = DWC
2.
Indirect Method: (WC[t2] - WC[t2] x 365 ) / Yearly Turnover = DWC
Example
With an assumed capital cost ratio of 8% the kpi’s of working capital
have these results:
DSO: 34'800.-
DIO: 6'666.67
DPO: -12'000.-
That equeals total costs of 29’466.67. Depending on further
circumstances these costs have also a direct impat to the liquidity.
The triggers for an optimization or trade receivables, trade payables
and mainly inventory turnover. For a sustainable success it is
mandatory to act strategic. That means, not just begging customers
for faster paymen or vendors for later payment. More from inside to
outside and thinking in clusters. Just this way a winning achievement
is possible. Are you interested how much your working capital cost and how much funds are locked? You will be surprised! Click here, in the
download area is a free excel tool to calculate those numbers.
Key Elements for Working Capital Management
•
Improvement of working capital unlocks frozen liquid funds, increase the free cash flow and reduce the inventory- and capital costs. (n.b. Free
Cash Flow = [Operating Cash Flow] + [Investment Cash Flow])
•
Consciously improvement of working capital processes release in average 20% - 30% tight capital.
•
The value of the company increase by re-investing the released funds. In consqueence the turnover rise what will lead to a better operational
cash flow by sametime reducing capital costs (same conditions assumed)
•
Working Capital is also an indicator for an upcoming crisis. If working capital rise faster than the turnover it means that more capital must have
been used that is at the end of the day just locked in operational processes. About three years before a liquidity crisis the ratio of [WC] /
[Balance Sheet Total] increase clearly.
Managing Working Capital
Working Capital is per definition the short term part of a general ledger (see above). But it will be managed also by long term driven positions. Short
Term: operational processes (Purchase, Sales, Payments). Long Term: liquidity effective procedures like the disposal of fixed assets for cash or
repayment of long term liabilities and also change in equity for capital fund.
Approach for Improvment
A) Vendors
Don’t
•
Don’t start to extend payments to suppliers - at the end the end the customer is paying.
•
Especially key-vendors are essential. If those vendors stop to deliver, you are unable to produce anything.
•
Reminders for late payment, evil calls or bad credit-worthiness are the consequences.
•
Among troubles, what costs also time and money, you will enter into a risk to get worse conditions for existing and new vendors and certainly
also banks.
Instead
•
Prioritize verndors and segregate them for todays and future deliveries as well as for financial processes.
•
Rate your vendors individually, i.e. for readiness for deliver, quality of the deliveries, financial health, conditions. How vendors can be ratet is
part of our article in our news-corner here as an example for banks..
•
At least yearly negotiations with vendors. Time for personal meetings are well invested, instead just simple letters like: “beginning with next
month, we pay your invoices 4 days later”.
Read also our article about vendor management here.
B) Inventory
Don’t
•
Reduction of a safety stock can cost much more as it seems to be on a paper.
•
The consequences start with higher delivery costs, because a lower stock increase the number of orders per cycle. Higher prices arise in the
following because of scale-effects and also potential dissatisfaction of customers need to be considered because they don’t get their products
in the right time.
•
Impacts on turnover based incentives for the sales staff and the management may lead to troubles up to resignation and dismissals.
Instead
•
Deversify between semi-finished goods and finished goods. Semi-finished goods have an impact to the producution and have therefore just
indirect impact to the satisfaction of customers. Finished goods have an ultimate direct impact to the customers and therefore to the turnover.
•
Distinguish for goods with high, middle and low inventory turnover.
•
All goods should be compared by supplier in a matrix and clustered for the ideal lot size. See also our excel tool to calculate the ideal lot-size
by Andler for free download in our download area.
C) Customers
Don’t
•
Don’t dictate from one day to the other new payment terms. In the best case the customers ignore the new terms, but then nothing is
achieved. In the worst case customers quit the friendship.
•
Every customer is individual. Thus, don’t measure all customers with the same objectves.
•
Don’t think that customers stay because the product might a good one.
•
Don’t assume that a customer stays always the same.
Instead
•
Differentiate large and small customers as well as good and poor payer.
•
Have an interest for the customers of your customer in order to find out what those 2nd line customers request and how they behave. Thereby
you have a good basis for individual negotiations. Afterwards you are in a much better position to discuss more favourite payment and
delivery terms.
•
Be consequent with bad payer. Urge them max. twice and go then further with legal actions. Because it is much wiser to waive turnover as to
spend the products for nothing! Just alone with turnover on nice sheets nobody can pay their liabilities. That’s also the reason why turnover is
quite a bad kpi for incentives.
Read more about Working Capital in our article “Working Capital as Barometer of Effencieny”.
Contact us, we would be glad to show you the possible opportunities!
Working Capital / Tied Capital
Leaning of working capital processes reduce interest expenses,
release capital and improve key figures!
Working Capital may be defined by
efficiency of a company and their
shortterm financial health. A
positive working capital means that
a company is theoretically able to
pay the shortterm liabilities.
Nevertheless, with the requirement
that sufficient liquidity is available.
Negative working capital means the
respective opposite.
Short Term Assets - Short Term Liabilities = Working Capital
(whereas short-term means with a remaining maturity of less than a
year)
Terms, Key Performance Indicators
•
Days Sales Outstanding (DSO): Difference in days between
invoice date and customer payment
•
Days Payable Outstanding (DPO): Difference in days between
supplier invoice date and payment to supplier
•
Days Inventory Outstanding (DIO): Difference in days between
invoice date of the supplier and the invoice to the customer for
a specific good. (Because the cash impact is not counting with
the physical entry- or exit of the good in the warehouse. It is
the invoice date of the supplier invoice resp. invoice to the
customer -> be aware of accruals!)
•
Days Working Capital (DWC) - Days, how long it needs to
convert working capital in revenue. Also called “Cash Days”.
Calculation
1.
Direct Method: DSO - DPO + DIO = DWC
2.
Indirect Method: (WC[t2] - WC[t2] x 365 ) / Yearly Turnover =
DWC
Example
With an assumed capital cost ratio of 8% the kpi’s of working capital
have these results:
DSO: 34'800.-
DIO: 6'666.67
DPO: -12'000.-
That equeals total costs of 29’466.67. Depending on further
circumstances these costs have also a direct impat to the liquidity.
The triggers for an optimization or trade receivables, trade payables
and mainly inventory turnover. For a sustainable success it is
mandatory to act strategic. That means, not just begging customers
for faster paymen or vendors for later payment. More from inside to
outside and thinking in clusters. Just this way a winning achievement
is possible. Are you interested how much your working capital
cost and how much funds are locked? You will be surprised!
Click here, in the download area is a free excel tool to calculate
those numbers.
Key Elements for Working Capital Management
•
Improvement of working capital unlocks frozen liquid funds,
increase the free cash flow and reduce the inventory- and
capital costs. (n.b. Free Cash Flow = [Operating Cash Flow] +
[Investment Cash Flow])
•
Consciously improvement of working capital processes
release in average 20% - 30% tight capital.
•
The value of the company increase by re-investing the
released funds. In consqueence the turnover rise what will
lead to a better operational cash flow by sametime reducing
capital costs (same conditions assumed)
•
Working Capital is also an indicator for an upcoming crisis. If
working capital rise faster than the turnover it means that more
capital must have been used that is at the end of the day just
locked in operational processes. About three years before a
liquidity crisis the ratio of [WC] / [Balance Sheet Total]
increase clearly.
Managing Working Capital
Working Capital is per definition the short term part of a general
ledger (see above). But it will be managed also by long term driven
positions. Short Term: operational processes (Purchase, Sales,
Payments). Long Term: liquidity effective procedures like the
disposal of fixed assets for cash or repayment of long term liabilities
and also change in equity for capital fund.
Approach for Improvment
A) Vendors
Don’t
•
Don’t start to extend payments to suppliers - at the end the
end the customer is paying.
•
Especially key-vendors are essential. If those vendors stop to
deliver, you are unable to produce anything.
•
Reminders for late payment, evil calls or bad credit-worthiness
are the consequences.
•
Among troubles, what costs also time and money, you will
enter into a risk to get worse conditions for existing and new
vendors and certainly also banks.
Instead
•
Prioritize verndors and segregate them for todays and future
deliveries as well as for financial processes.
•
Rate your vendors individually, i.e. for readiness for deliver,
quality of the deliveries, financial health, conditions. How
vendors can be ratet is part of our article in our news-corner
here as an example for banks..
•
At least yearly negotiations with vendors. Time for personal
meetings are well invested, instead just simple letters like:
“beginning with next month, we pay your invoices 4 days
later”.
Read also our article about vendor management here.
B) Inventory
Don’t
•
Reduction of a safety stock can cost much more as it seems to
be on a paper.
•
The consequences start with higher delivery costs, because a
lower stock increase the number of orders per cycle. Higher
prices arise in the following because of scale-effects and also
potential dissatisfaction of customers need to be considered
because they don’t get their products in the right time.
•
Impacts on turnover based incentives for the sales staff and
the management may lead to troubles up to resignation and
dismissals.
Instead
•
Deversify between semi-finished goods and finished goods.
Semi-finished goods have an impact to the producution and
have therefore just indirect impact to the satisfaction of
customers. Finished goods have an ultimate direct impact to
the customers and therefore to the turnover.
•
Distinguish for goods with high, middle and low inventory
turnover.
•
All goods should be compared by supplier in a matrix and
clustered for the ideal lot size. See also our excel tool to
calculate the ideal lot-size by Andler for free download in our
download area.
C) Customers
Don’t
•
Don’t dictate from one day to the other new payment terms. In
the best case the customers ignore the new terms, but then
nothing is achieved. In the worst case customers quit the
friendship.
•
Every customer is individual. Thus, don’t measure all
customers with the same objectves.
•
Don’t think that customers stay because the product might a
good one.
•
Don’t assume that a customer stays always the same.
Instead
•
Differentiate large and small customers as well as good and
poor payer.
•
Have an interest for the customers of your customer in order to
find out what those 2nd line customers request and how they
behave. Thereby you have a good basis for individual
negotiations. Afterwards you are in a much better position to
discuss more favourite payment and delivery terms.
•
Be consequent with bad payer. Urge them max. twice and go
then further with legal actions. Because it is much wiser to
waive turnover as to spend the products for nothing! Just
alone with turnover on nice sheets nobody can pay their
liabilities. That’s also the reason why turnover is quite a bad
kpi for incentives.
Read more about Working Capital in our article “Working
Capital as Barometer of Effencieny”.
Contact us, we would be glad to show you the possible
opportunities!
efficiency of a company and their
shortterm financial health. A
positive working capital means that
a company is theoretically able to
pay the shortterm liabilities.
Nevertheless, with the requirement
that sufficient liquidity is available.
Negative working capital means the
respective opposite.
Short Term Assets - Short Term Liabilities = Working Capital
(whereas short-term means with a remaining maturity of less than a
year)
Terms, Key Performance Indicators
•
Days Sales Outstanding (DSO): Difference in days between
invoice date and customer payment
•
Days Payable Outstanding (DPO): Difference in days between
supplier invoice date and payment to supplier
•
Days Inventory Outstanding (DIO): Difference in days between
invoice date of the supplier and the invoice to the customer for
a specific good. (Because the cash impact is not counting with
the physical entry- or exit of the good in the warehouse. It is
the invoice date of the supplier invoice resp. invoice to the
customer -> be aware of accruals!)
•
Days Working Capital (DWC) - Days, how long it needs to
convert working capital in revenue. Also called “Cash Days”.
Calculation
1.
Direct Method: DSO - DPO + DIO = DWC
2.
Indirect Method: (WC[t2] - WC[t2] x 365 ) / Yearly Turnover =
DWC
Example
With an assumed capital cost ratio of 8% the kpi’s of working capital
have these results:
DSO: 34'800.-
DIO: 6'666.67
DPO: -12'000.-
That equeals total costs of 29’466.67. Depending on further
circumstances these costs have also a direct impat to the liquidity.
The triggers for an optimization or trade receivables, trade payables
and mainly inventory turnover. For a sustainable success it is
mandatory to act strategic. That means, not just begging customers
for faster paymen or vendors for later payment. More from inside to
outside and thinking in clusters. Just this way a winning achievement
is possible. Are you interested how much your working capital
cost and how much funds are locked? You will be surprised!
Click here, in the download area is a free excel tool to calculate
those numbers.
Key Elements for Working Capital Management
•
Improvement of working capital unlocks frozen liquid funds,
increase the free cash flow and reduce the inventory- and
capital costs. (n.b. Free Cash Flow = [Operating Cash Flow] +
[Investment Cash Flow])
•
Consciously improvement of working capital processes
release in average 20% - 30% tight capital.
•
The value of the company increase by re-investing the
released funds. In consqueence the turnover rise what will
lead to a better operational cash flow by sametime reducing
capital costs (same conditions assumed)
•
Working Capital is also an indicator for an upcoming crisis. If
working capital rise faster than the turnover it means that more
capital must have been used that is at the end of the day just
locked in operational processes. About three years before a
liquidity crisis the ratio of [WC] / [Balance Sheet Total]
increase clearly.
Managing Working Capital
Working Capital is per definition the short term part of a general
ledger (see above). But it will be managed also by long term driven
positions. Short Term: operational processes (Purchase, Sales,
Payments). Long Term: liquidity effective procedures like the
disposal of fixed assets for cash or repayment of long term liabilities
and also change in equity for capital fund.
Approach for Improvment
A) Vendors
Don’t
•
Don’t start to extend payments to suppliers - at the end the
end the customer is paying.
•
Especially key-vendors are essential. If those vendors stop to
deliver, you are unable to produce anything.
•
Reminders for late payment, evil calls or bad credit-worthiness
are the consequences.
•
Among troubles, what costs also time and money, you will
enter into a risk to get worse conditions for existing and new
vendors and certainly also banks.
Instead
•
Prioritize verndors and segregate them for todays and future
deliveries as well as for financial processes.
•
Rate your vendors individually, i.e. for readiness for deliver,
quality of the deliveries, financial health, conditions. How
vendors can be ratet is part of our article in our news-corner
here as an example for banks..
•
At least yearly negotiations with vendors. Time for personal
meetings are well invested, instead just simple letters like:
“beginning with next month, we pay your invoices 4 days
later”.
Read also our article about vendor management here.
B) Inventory
Don’t
•
Reduction of a safety stock can cost much more as it seems to
be on a paper.
•
The consequences start with higher delivery costs, because a
lower stock increase the number of orders per cycle. Higher
prices arise in the following because of scale-effects and also
potential dissatisfaction of customers need to be considered
because they don’t get their products in the right time.
•
Impacts on turnover based incentives for the sales staff and
the management may lead to troubles up to resignation and
dismissals.
Instead
•
Deversify between semi-finished goods and finished goods.
Semi-finished goods have an impact to the producution and
have therefore just indirect impact to the satisfaction of
customers. Finished goods have an ultimate direct impact to
the customers and therefore to the turnover.
•
Distinguish for goods with high, middle and low inventory
turnover.
•
All goods should be compared by supplier in a matrix and
clustered for the ideal lot size. See also our excel tool to
calculate the ideal lot-size by Andler for free download in our
download area.
C) Customers
Don’t
•
Don’t dictate from one day to the other new payment terms. In
the best case the customers ignore the new terms, but then
nothing is achieved. In the worst case customers quit the
friendship.
•
Every customer is individual. Thus, don’t measure all
customers with the same objectves.
•
Don’t think that customers stay because the product might a
good one.
•
Don’t assume that a customer stays always the same.
Instead
•
Differentiate large and small customers as well as good and
poor payer.
•
Have an interest for the customers of your customer in order to
find out what those 2nd line customers request and how they
behave. Thereby you have a good basis for individual
negotiations. Afterwards you are in a much better position to
discuss more favourite payment and delivery terms.
•
Be consequent with bad payer. Urge them max. twice and go
then further with legal actions. Because it is much wiser to
waive turnover as to spend the products for nothing! Just
alone with turnover on nice sheets nobody can pay their
liabilities. That’s also the reason why turnover is quite a bad
kpi for incentives.
Read more about Working Capital in our article “Working
Capital as Barometer of Effencieny”.
Contact us, we would be glad to show you the possible
opportunities!
