Finding the balance: Working capital management vs. corporate resilience

published on 2 december 2024 | reading time approx. 2 minutes

The increase in interest rates in recent years has constituted a significant challenge for numerous companies, prompting banks to adopt more rigorous lending practices. In this context, working capital management presents an opportunity to reduce fixed capital and thus increase liquidity without additional external debt financing. However, the current market environment is also characterized by increased uncertainty (e.g., due to raw material/price shortages or bottlenecks in the supply chain), which requires a higher level of capital tied up in inventories. Thus, the question arises as to the optimal level of working capital required to generate liquidity without compromising the necessary resilience of the business.

Working capital management 2.0 through end-to-end process analysEs

In order to generate liquidity from working capital without reducing resilience, it is essential to engage in a process of careful consideration with regard to the implementation of liquidity anagement measures. In addition to the traditional working capital measures, such as creditor management, it is advisable to analyze working capital from a number of different perspectives in order to identify potential:

Benchmarking of balance sheet working capital figures in an industry comparison
Debtor, creditor and inventory management
End-to-end analysis of key working capital processes

While benchmarking, debtor-, creditor and inventory management are integral aspects of traditional working capital management, the incorporation of end-to-end process analysis represents a significant advancement in the field (Working Capital Management 2.0). This approach goes beyond the conventional focus on receivables, payables, and inventories, encompassing a more comprehensive examination of the underlying processes that shape a company's financial health.

Order-to-cash process: from sales management or customer order to allocation of customer payment
Purchase-to-pay process: from supplier management or order to payment
Forecast-to-fulfill process: from sales planning to customer delivery

The process-based approach allows for the potential reduction of process duration and the enhancement of process efficiency. The initial stage of the process is to define the three main processes in terms of both level of detail and process steps, with due consideration given to the interdependencies between the processes. Subsequently, the time and/or cost in euros per process step related to working capital is identified and allocated to the corresponding process step. Subsequently, the potential analysis is conducted, whereby the outcomes of the preceding steps can be employed to ascertain potentialities and measures at the process level. To illustrate, the synchronization of sales and materials planning with sales management could diminish the proportion of superfluous orders and, consequently, inventory levels. Moreover, the end-to-end perspective offers the potential to derive implications extending beyond working capital.

CONCLUSION

In recent years, several economic changes have occurred, increasing the importance of efficient and intelligent working capital management based on intelligent analytics. A variety of measures can be implemented, commencing with a review of balance sheet ratios and extending to in-depth process-related analyses. When engaging intensively with working capital management and the associated processes, the involvement of experienced consultants is crucial for efficiency and the utilization of comprehensive expertise. Regardless of the approach taken, enhancing working capital management is not about merely reducing expenditure; it is about achieving a balance between efficiency and resilience.

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