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Created on 12.11.2018

The main errors in working capital management

Working capital management offers great potential for liquidity planning, but there are also stumbling blocks to overcome. The WCM experts at PostFinance point out three common errors in managing net working capital and explain how to avoid them.

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Many companies in Switzerland do not pay enough attention to working capital management or make avoidable errors with liquidity planning. This can reduce free cash flow, restricting investment and growth, but can also have an adverse effect on profitability. We’ll show you what you need to focus on to ensure optimal working capital management and which errors you should avoid in order to optimize liquidity.

First error: leaving WCM up to individual functions

One of the major challenges of working capital management is that it is always caught in the area of conflict between different functional and company units. Procurement, sales, logistics and controlling: they all have an influence on working capital – and they all aim to achieve constant optimization from their own perspective. This means different objectives are pursued simultaneously which can also have an impact on cash flow.

For example, the main aim of sales is to maximize revenue and drive up service quality. Procurement’s main focus is on supplying production and cutting purchasing costs. One of logistics’ key benchmarks is low inventories and low stock turnover. If a company assigns WCM to one of these functional units, conflicting priorities in liquidity planning are inevitable. Cash flow will not improve.The operational unit which puts the most effort into working capital management will ultimately have the greatest influence on working capital. Avoid this error by developing and implementing a binding, cross-functional strategy for your company.

Second error: not taking advantage of the best creditworthiness

In the course of our activity as working capital management advisors, we regularly discover that companies are not taking advantage of the best creditworthiness along the supply chain to optimize their working capital and reduce their financing costs. Avoid making this error by analysing creditworthiness along your supply chain so that you can detect any relevant potential. Depending on whether it is your company itself, one of your suppliers or one of your customers that has the best credit standing, you have the following bank-independent or bank-dependent solutions available to you:

 Solution
Suppliers
Your company
Customers
 Solution
Bank-independent solution
Suppliers
  • Financing your inventories (vendor-managed inventory)
  • Extending the payment terms for your company
Your company
  • Financing inventories for suppliers or customers
  • Extending the payment terms for customers
  • Reducing the payment terms for suppliers
Customers
Reducing the payment terms for your company
 Solution
Banking solution
Suppliers
Factoring to finance your company
Your company
  • Factoring to finance the customer or your own company
  • Reverse factoring / dynamic discounting to finance suppliers or your own company
  • Inventories financing/off-balance logistics to finance your company, suppliers or customers
Customers
Reverse factoring to finance your company

Third error: WCM is regarded merely as a project

We have observed that working capital management is often only treated as a project by companies. This is rarely efficient and results in the following behaviour: the company notices that working capital – the difference between current assets and current liabilities – has risen sharply unexpectedly. Cash flow falls, the alarm bells start ringing. The company then analyses the key benchmarks, launches an optimization project and appoints a manager. He or she starts with planning, scrutinizes liquidity planning closely and implements measures so that as little capital as possible is tied up in current assets.

As soon as the WCM solutions have brought about the desired results, the company turns its attention to other matters. And the cycle begins again: working capital increases until it is time for the next WCM project. Are you familiar with this scenario? We advise avoiding this error by keeping working capital management high on the agenda and treating it as a constant issue rather than a short term measure. Make WCM a line management issue. This will ensure you make efficient use of your capital.

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