Knowledge is power!
The liquidity of your company is of paramount importance for its vitality and continuity. SMEs frequently underestimate the importance of effective working capital management: money freed up by good working capital management can be used for new strategic investments. Additionally, it reduces the dependency on external financing.
Put differently, freeing up cash broadens your companies’ investment opportunities.
So how do you free up cash exactly?
By optimizing the following important components of working capital: inventory and work in progress (WIP), accounts receivable and accounts payable. Together, they are the “cost of purchases that have not yet been converted into cash by sales”.
Working capital can be optimized by lowering the inventory level and WIP, lowering your accounts receivable and optimizing the accounts payable.
Optimization of working capital
- Inventory and Work in Progress (WIP) ↘
- Accounts Receivable ↘
- Accounts Payable ↗
Awareness for the importance of effective working capital management is often the starting point for working capital improvements. However, be aware that awareness should not be limited to the financial department alone. The purchase, sales, production and logistics department also have a significant impact on working capital management.
In addition to awareness, the following aspects are also important to organizing effective working capital management:
- The responsibilities within working capital management should be clear. Clear responsibilities result in transparent communication.
- Working capital should be measured. By translating the effectiveness of the working capital management into certain indicators (performance indicators or KPIs), you can measure and - if necessary – adjust. The numbers tell the tale.
Mechanisms of working capital
During the coming weeks, we will take you on a journey through the mechanisms of working capital. We will present actions you can take to free up cash. Each week, we discuss one topic:
We discuss consecutively:
We will present in a clear way the impact and role of each component within your organization, the opportunities and threats that go hand in hand with working capital and give some tips on how you can optimize each component optimally.
These articles will help you to free up cash within your company by employing effective working capital management.
Do you also wish to improve theworking capital in your SME? We are happy to come and visit. Email us at firstname.lastname@example.org or call us on +32 9 378 38 28 for more information.
Frederik Vervoort - 8 September 2016