Working capital management

Cash flow by optimizing working capital

Efficient and sustainable working capital optimization generally enhances the efficiency of a company's business. It can increase capital turnover, improve cash liquidity, and return on investment. Working capital management can also be optimized, for example, in exceptional situations of a company or the general economic situation, in which case there is a clear change in the company's cash flow.

Working capital management is the optimization of committed working capital along the entire value chain of a company. The different parts of the production chain and the stages from manufacturing to distribution affect all areas of working capital. Working capital can be optimized, for example, by negotiating longer payment periods for purchase invoices and other liabilities, by improving the inventory turnover rate and by improving the collection of trade receivables, through which the cash is made longer

Knowing the current state makes it easier to develop operations

Current state analysis of financial management can be used to map the current state of working capital, how it has developed over the years, and how the various areas have developed in absolute terms and turnover rates (trade receivables, trade payables, inventory). The information obtained from the analysis is compared with other companies operating in the same industry, which can be used to determine the will of the company's management in setting goals. On the basis of these, new goals are set for the next year and detailed measures are taken.

How can working capital management be concretely improved?

• Accounts receivable: Turnover can be improved by issuing group instructions to sales and salespeople, negotiating shorter payment terms for existing customers, and tightening collection processes by following regular collection routines and reminding key customers in advance. (if customers who are constantly late paying > advance payments to them in the future, etc.)
• Accounts payable: Improving the turnover rate through group guidelines for procurement, negotiating longer payment terms for existing suppliers and tightening the payment terms for indirect purchases in the purchasing policy. For example, making a payment once a week and negotiating the delivery times of raw materials.
• Inventory: Clarify inventory ownership issues by leveraging the share of existing consignment suppliers (i.e., inventory supplier inventory until commissioned), negotiating new consignment suppliers, and thereby reducing the balance of raw material inventories and accelerating turnover. Inventory processes can be improved by putting the basic inventory processes in order by making inventory instructions and ensuring posting policies as well as fast delivery of finished goods. To improve inventory turnover, there is also a need for workable ways to forecast sales orders so that raw materials do not have to be ordered unnecessarily to settle in the raw material warehouse. This requires good customer relationships and the customer’s willingness to predict their own need.
• Analyzing the product portfolio and developing a product strategy in terms of working capital: Examine the recipe used to make products and whether they require different raw materials or materials and special customization to the production line. Is it possible to make the products with a larger reasonable volume or do the specific products unnecessarily tie up the stock and thus prolong the turnover rates. Identifying and optimizing waste materials, for example, is also an important part of the process.
  
  

Improving working capital requires that the amount of trade receivables and inventory, as well as the turnover rate, decrease as the share of trade payables increases and their turnover rate increases.

Greenstep experts at your service

Our experts will help you manage your working capital by mapping out the current state of your company’s finances, through which you can make a plan to optimize your working capital. We take advantage of modern tools such as PowerBI and BiBook to give us a clear picture of the state of the economy and to keep track of working capital efficiency metrics: what are trade receivables, what is their average payment time, how trade receivables are thus cash flow.

Greenstep’s CFO team consists of approximately 40 experienced experts with extensive industry expertise and experience from a variety of client types from startups to listed companies. We are well aware of the needs and best practices of companies at different stages and operating in different industries.