Working capital management can be used as an instrument or holistic approach to improve the liquidity and profitability of a company. The aim of Working capital management focused on optimizing so-called financial supply chain, so the financial flows of a company, a reduction in working capital (net current assets).
Improvement is done primarily in the optimization of inventories and accounts receivable and payable management. Working capital management is based on the concept of the cash conversion cycle. This concept illustrates the capital tied up during the sales process. The in inventories, as Raw materials, and receivables tied capital is transformed only when payment of the goods produced by the customer back into cash. Only then, the Company has the capital again in the form of cash, as available for investment.
The object of working capital management is to optimize certain processes and thereby reduce the capital employment. This is in particular by increasing the exterior prior days of liabilities (Days Payables Outstanding – DPO) as well as the reduction of the duration of Inventories (Days Inventory Outstanding – DIO) and the period of arrears (Days Sales Outstanding – DSO) sought.
Capital employed is derived from the duration of inventories added to the outstanding balance of the receivables less days of sales outstanding days of liabilities. Thus, the individual processes have direct impact on the capital employed.
 The metrics of working capital management and its related processes must be regularly analyzed and monitored by the financial and liquidity controlling unit of a company. Defined targets for each area must be checked for their compliance with or the degree of target achievement.
To influence and optimization of the determined values ​​are of plenty of opportunities. In the field of management of liabilities (Purchase to Pay), so the outgoing payment, an improvement can be achieved by the time of payment is displaced, so that payment periods are maxed out, in which case the loss of discounts received are taken into account.
This can e.g. be achieved through standardized payment runs at specified time points (payment dates). Further optimization possibilities are e.g. in the targeted delivery, for example, Just in Time, or in setting up a consignment warehouse.
In the area of ​​receivables (order to cash), so the receipt, a early as possible receipt of cash is sought. This can be achieved through a targeted demand management, in particular through consistent reminders, and in this regard, for example, by integrating the sales department with respect to the reduction of high debts, by introducing limits on the debtor creditworthiness and by invoicing, which is carried out on schedule.
Other options offer the sale of receivables (factoring) or the design of the payment, so as Payments or prepayment. Also timely delivery, reducing the number of complaints of products sold and avoid billing errors can contribute to the improvement.
By strict working capital management, optimization of the balance sheet structures are achieved. The ratio of equity and debt improved in the course of reducing tied up in current assets capital. A so-induced reduction in total assets has, in particular with regard to the capital requirements of Basel II, positive impact on the financial situation of a company or the assessment (rating) by external lenders.
This is especially for medium-sized companies on the basis of this often difficult financial situation, and particular consideration of equity interest (equity ratio) in debt allocation by credit institutions of importance.
Working Capital Management provides companies, even with only partial implementation, such as in smaller companies, extensive optimization potential: additional liquidity, an increase in the Profitability and, by the balance sheet contraction and optimization, also an improvement in the financial situation and the assessment (rating) by external investors.
