Working Capital Management

How professionals secure liquidity

Financial professionals know a number of ways to secure liquidity:

• Take out loans.
• Consistently manage the receivables and dunning process.
• Manage stocks and warehouses intelligently.

Each of the options strengthens liquidity, but only the third option does not require external influence, i.e. it is independent of the approval and actions of third parties.

How is working capital calculated?

Working capital is calculated as the difference between current assets and current liabilities. This key figure provides information about a company’s short-term solvency.

Working Capital =

Cash and cash equivalents
+ Receivables
+ Inventories
− (short term) Liabilities
+ Advance payments made
− Advance payments received

= Net current assets

A positive value indicates that the company can finance current liabilities from its own cash and cash equivalents.
It is therefore independent of financing at extra cost. It can continue its operations without disruption, reduce liabilities or make investments.

Warehouse management in the light of working capital management

When discussing working capital management, receivables management often takes centre stage. Inventory management and supplier management often remain in the shadows.

This means that companies are missing out on opportunities: a compact, tightly managed warehouse ties up less cash. Some experts believe that the amount of capital tied up can be reduced by 10 to 30 per cent through skilful working capital management.

A analyses by PwC PricewaterhouseCoopers supports this impression. The analysts examined 50 retail companies in Germany, Austria and Switzerland between 2014 and 2018. Revenue increased by 19 per cent during this period. At the same time, however, the proportion of tied-up capital grew.
Retail companies are under particular pressure, as customers today expect a large selection with fast delivery.At the same time, customers buy on account and return a large proportion of the goods delivered.

Other sectors are also familiar with these problems.However, retail companies are particularly challenged to find a balance between customer service and profitability.

Increase working capital

Possible measures to increase working capital include the following:

• Accelerated procurement channels allow for lower stock levels.
• Switching to fast-moving items increases cash and cash equivalents.
• The reduction of slow-moving products and products reduces the capital tied up.

When and to what extent those responsible replenish stocks has a direct impact on working capital.

Evaluate key figures

But at what point is stock in order? Generalised answers are doubtful. However, the key figure “third-degree liquidity” is suitable for orientation and an initial approximation. It is calculated as follows:

Liquidity of the 3rd degree =

((Liquid funds + Current receivables + Inventories)
/ Current liabilities)
* 100

A value below 100 per cent

A result of less than 100 per cent is a bad sign, as current liabilities must be financed from fixed assets. There are probably problems with sales and/or pricing.

Values greater than 120 per cent

A target value greater than 120 per cent is considered desirable.

Values greater than 150 per cent

A value above 150 per cent usually indicates an excessively large warehouse.

Valuation 365 by CKL

Payment delays or payment defaults are side effects of the economic crisis that can only be partially offset by the company’s own efforts. This is why it is particularly worth taking a look at an “optimally value-managed” warehouse in these times.

In one of our next webinars, you will see how you can effectively use the lever to increase liquidity and how CKL’s Valuation 365 app supports you in doing so. Find out more and register.