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Created on 12.11.2018

Three findings from working capital management consulting

PostFinance’s WCM experts help companies to analyse and implement WCM measures. The following three findings were determined from years of working as consultants.

Liquidity is the basis of many key figures for companies. Working capital management therefore performs a core function in your company – regardless of whether it’s an SME or large corporation. The following three findings from the consultation of many business customers may help you to optimize your current assets and to improve your profitability. 

First finding: high potential for impressive working capital results

The findings of our consultation reveal that opportunities exist in almost every company to optimize working capital. Outstanding accounts receivable and liabilities, but also inventory management at retail and production companies, can be improved, for example. Highly impressive results can be achieved through clear analysis and targeted measures such as factoring, for instance.  This can be seen, for example, in the following cases from PostFinance’s WCM consultation activities where factoring was used.

Case 1: In a manufacturing company with a sales volume of 150 million francs a year, factoring enabled tied-up capital to be reduced by 25 million francs, and finance charges to be cut by 6 percent (WACC, weighted average cost of capital) to 1.2 percent (see illustration, figures for illustrative purposes only).

Numerical example of factoring for a manufacturing company

Case 2: In a major corporation, dynamic discounting led to an improvement in the financial result of over 2 million francs, and procurement costs were reduced by more than 2 million francs (see illustration, figures for illustrative purposes only).

Numerical example of dynamic discounting for a major corporation

Harnessing the potential  of working capital management  for your company. Whether with factoring, dynamic discounting or other solutions, such as reverse factoring. The measures will improve your liquidity, capital structure, financing costs and ultimately your earnings before tax and performance.

Second finding: the more individual the solution, the greater its effect

To achieve the greatest possible impact with  working capital management measures  and to optimize  working capital in the best possible way, measures must be individually tailored to your company. The accounting aspect is an important point to consider, for example. Particularly with banking solutions, you should check that the effects of the working capital measures can actually be achieved in practice. The auditors must be prepared to accept amounts  from controlling  as trade accounts payable and not to declare them as financial liabilities in the case of a factoring solution, for example. To ensure that this is possible, a great deal of experience is needed with regard to WCM consultation. An individual solution also guarantees optimal compatibility with your current tools and systems. Last but not least, by introducing an individual solution, you can avoid unnecessary additional expenditure. This requires a creative approach with a constant focus on the cost-benefit ratio. It may be worth implementing WCM measures for major invoice items only, for instance, while ignoring smaller invoice amounts.

Third finding: working capital must be evaluated appropriately

In our capacity as WCM advisors, we find that companies use a wide range of different methods to evaluate working capital. While some assess working capital according to the external financing rate, others use the weighted average cost of capital (WACC) or even the Libor for evaluation purposes. And others still apply a constant imputed percentage of 10 percent, for instance – regardless of interest rate levels. A common method for assessing the cost of working capital is to take the weighted average cost of capital and calculate how this corresponds to the periodicity of inventories, accounts receivable and liabilities, and the periodicity of interest. Items tied up in the short term are evaluated using short-term interest rates, and those tied up in the long term with long-term interest rates. By applying this method, you will soon find that your working capital entails relatively high costs – and that solutions such as factoring, reverse factoring or dynamic discounting represent a good way of reducing these costs. Solutions of this kind also allow you to create effective win-win situations along your value chain (supply chain) which is why they are often referred to as supply chain finance solutions.

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