Improve the working capital

Improving the working capital is a key objective of most of companies. Only few of them manage to get paid by their customers before having to pay suppliers and other charges.

The working capital requirement has a direct impact on cash available in the company and on its financial capacities to growth.

There are three main axes to improve working capital requirement:

» Reduction of receivables,
» Reduction of inventories which is intrinsically linked to the optimization of the global supply chain,
» Increase of suppliers debt.

The prerequisites for engaging a WCR action plan

The work on the WCR is a transverse activity concerning all sectors of the company. It "challenge the processes", which can cause internal tensions and resistance to change.

To be effective, it is necessary that:

» That management involvement is strong and is associated with a general awareness of the value of the reduction in working capital for both liquidity constraints and profitability, but also organizational effectiveness.
» A diagnosis is made ​​through an evaluation of all processes that can potentially raise working capital requirement,
» An action plan with an implementation schedule is established in which the actions that have the greatest impact on working capital requirements are prioritized,
» That people involved in the actions are trained on the working capital stakes,
» That indicators for monitoring performance and individual goals are established.

Reduction of accounts receivable

It can be obtained by:

• Reducing payment delays, obtained through a mobilization of business so they incorporate into their trade negotiating reduced payment delays,
• Negociating down payments,
• A seamless billing process: the invoice is issued on the day of delivery and it is right the first time, to avoid litigation, that slow client payments,
• General terms and conditions of sales updated and specifying an effective payment method adapted to your activity (avoid checks),
• An efficient bills collection process,
• A fast consideration of invoices disputes (technical, administrative, commercial disputes) with immediate work together between the sales, customer care and administrative people,
• A mobilization of receivables (factoring, discount...),
• An incentive of vendors on the paid turnover and down payments received.

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Reduction of inventories

It can be obtained by:

• Accurate inventories management either from a physical standpoint (confined space, entry and exit controlled) as a virtual viewpoint (inventory management system adapted and updated in real time),
• Regular inventories,
• A methodical supply management based on a lean approach,
• An improvement of inventories rotation,
• Short procurement and delivery delays.

Increase of suppliers debt

This debt is a very important source of financing for businesses. It represents thousand of billions euros around the world! It is pertinent to consider it in the day to day management but also on a more strategic perspective:

Which activities should be carried out internally and which can be done externally? Outsourcing of secondary activities (which are not the core business of the company) is often beneficial from a working capital perspective. Indeed, the costs associated with outsourcing are advanced by the partner (subject to negotiations made) and the subcontractor benefits of a payment term.

Increase suppliers debt can be obtained by:

• Negotiating longer payment terms with suppliers and establishing a purchasing policy that promotes the interests of the company,
• Paying suppliers after invoices due dates. The obvious solution has to be prohibited because it has significant negative effects (non-compliance with commitments, loss of credibility, account blocked by suppliers ... etc). Vendors get quickly bored to play the role of banker…,
• Integrating the concept of working capital in some strategic choices: for example, subcontract or manufacture internally?
• By financing suppliers debt by a credit institution..