Working Capital Study

Working Capital In the Spotlight

Many companies have significantly improved their working capital management since the Covid pandemic began. Despite the high degree of maturity, companies should still keep the total cost of ownership in mind and ensure that processes and responsibilities are well structured.

Where working capital management may have been an afterthought in times of peak economic growth, it suddenly came under the spotlight with the Covidrelated slump in sales.

Almost three quarters (73 percent) of the participants in our current Working Capital Study said the subject is a high or very high priority.

However, skills have developed significantly: in our first study in 2020, a good 50 percent of participants said that working capital was managed poorly in their company, or that there was room for improvement, whereas now two thirds consider their work in that area to be good or very good.

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Digital tools as a basis for decisions

In fact, only 22 percent of the companies we spoke are currently not using standard payment terms. A year ago, it was twice as many. 59 percent now say that they can deviate from established standard payment terms if it helps them achieve a better total cost of ownership (TCO). This indicates a certain maturity: in times of negative interest rates, sidestepping standard terms is a sensible option. Using a digital tool to calculate the respective costs of alternative scenarios can be very helpful as a basis for decision making.

The trend is not so clear for the working capital KPIs: Although 61 percent of our contacts indicate that KPIs are included in management reporting, but only 44 percent say that targets are are defined. Plus, only 20 percent compare their data with their peer group. Clearly, a large number of companies surveyed rely on ERP reporting alone. Practical experience shows that it is absolutely essential for companies to define targets in advance, if they are to improve and gain clarity about how successful measures are.

Creating a working capital culture

The results of our study also show that many companies still do not have an established working capital culture, which will lead to suboptimal performance. Almost half of those surveyed say that their procurement department is not given an incentive to contribute towards optimizing working capital management.

Working capital management is a topic that needs to be addressed by all departments, as e.g. both sales and procurement determine key influencing factors when negotiating payment terms. Often, however, staff in both departments are unclear about this role and think that finance is the only department responsible for it.

Working capital management model

To raise awareness of the shared responsibility and create a genuine working capital culture in a company, the leadership team should set up a working capital management model with the finance, sales and procurement departments included. KPIs need to be specified in line with the company’s goals and passed on to the appropriate department.

The sections involved should then select people to be responsible for working capital, who, with the help of the management model, will review the department’s success in reaching their goals. Finally, working capital targets should be included in incentives. Intelligently selected gamification elements can draw the attention of staff to working capital and increase commitment.

Conclusion

Working capital management needs to be worked on across departments and staff involved need to have a basic understanding of how their actions influence working capital. It is important to define KPIs from the outset, if working capital management is to be successful, and they need to be specified for each department in turn. A management model supported by the right tools that enables continuous transparency in every area can help with achieving the goals that have been set.