Boost Business Resilience by Improving Net Working Capital

net working capital optimization

If it has too little, creditors may question whether the company can meet its obligations. Balance between assets and liabilities needs to be just right, yet striking that balance can become more challenging amid uncertainty. Companies that take analytics seriously set up their data infrastructure—and the organization around it—in a way that allows them to easily consolidate the information. A globally advanced industrial player, for example, made the ability to easily consolidate its data infrastructure a priority. This decision was, among others, triggered by the insights that arose from a time-consuming, painful, and manual consolidation exercise.

The added speed and insight can enable more efficient and effective diagnosis of obstacles to working capital processes, even helping to quantify and prioritize opportunities. As economic uncertainty persists, a more proactive approach to optimizing work capital can help insulate an organization from certain risks—and it’s more within senior management’s control than revenue. An unprecedented period of growth over the past decade may have lulled some organizations into a sense of comfort about working capital, giving it perhaps less attention than revenue and profitability.

Receivable Management

The company can be mindful of spending both externally to vendors and internally with what staff they have on hand. If a company is fully operating, it’s likely that several—if not most—current asset and current liability accounts will change. Therefore, by the time financial information is accumulated, it’s likely that the working capital position of the company has already changed. Current liabilities are simply all debts a company owes or will owe within the next twelve months. The overarching goal of working capital is to understand whether a company will be able to cover all of these debts with the short-term assets it already has on hand. Current assets are economic benefits that the company expects to receive within the next 12 months.

net working capital optimization

However, the company needed to extend the same tenure to its suppliers, leading to a misalignment between cash inflows and outflows. Working capital optimisation is achieved through comprehensive measures applied across all operational areas of your business including sales and procurement, inventory, payables and receivables management, and surplus cash management. Another way to review this example is by comparing working capital to current assets or current liabilities. For example, Microsoft’s working capital of $96.7 billion is greater than its current liabilities. Therefore, the company would be able to pay every single current debt twice and still have money left over. By forecasting sales, manufacturing, and operations, a company can guess how each of those three elements will impact current assets and liabilities.

Payment term analysis

However, there are other ways to increase accounts payable while keeping the payment terms unchanged. Inventory is an extremely difficult item of the working capital balance to manage as it has implications on the actual operations of the company. Finance and operations teams need to work together with aligned objectives set by upper management, something which doesn’t usually happen. Operations and finance usually have contrasting objectives when it comes to working capital. Operations departments tend to increase inventory levels to secure production and stock slow-moving articles in case these parts are needed in the future.

We helped establish weekly “Cash Council” calls to discuss key performance indicators (KPIs), progress, and follow-up action plans. $5.4 million in total working capital improvement net working capital optimization opportunities were identified, $3.9 million for O2C and $1.5 million for P2P. A total of $2.8 million was realized from the opportunities identified over three months.

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