The importance of working capital management is not to be underestimated: it keeps your business profitable while ensuring you can meet short-term obligations. But what is meant by working capital management – and how can Taulia help you optimize working capital for both you and your suppliers?

March 16, 2020
Sebastian Chilvers
Sebastian Chilvers

What is working capital management?

Working capital – defined as current assets minus current liabilities – is essential to the health of any business, but managing it effectively is something of a balancing act. Companies need to have enough cash available to cover both planned and unexpected costs, while also making the best use of the funds available. The key objectives of working capital management include:

  • Meeting obligations. Working capital management is a way of ensuring that the business has enough liquidity to meet its short-term obligations – often by collecting payment from customers sooner, or by extending supplier payment terms.
  • Growing the business. It’s also important to use your short-term assets effectively, whether that means supporting global expansion or investing in R&D. If your company’s assets are tied up in inventory or AP, the business may not be as profitable as it could be.

A company’s working capital performance can be measured in a number of ways. The cash conversion cycle (CCC) is the time it takes a company to convert its investment in inventory into cash. It has three components: Days Sales Outstanding (DSO), Days Payables Outstanding (DPO) and Days Inventory Outstanding (DIO).

CCC is calculated as DIO + DSO – DPO. So for example, a company with DSO of 45 days, DPO of 55 days and DIO of 50 days would have a CCC of 40 days. Companies can therefore improve (reduce) their CCC by extending DPO, reducing DSO or reducing DIO.

Companies may also look at a number of other metrics when gauging the success of a working capital program – from AP metrics, such as processing error rates, to analyzing a program’s impact on suppliers.

The importance of working capital management

In the past, companies may have focused on this topic in relation to specific events, like M&A or a stock repurchase. But companies today are more likely to see working capital management as a continuous activity. Some might even choose to build cash consciousness across the organization by appointing a cash optimization officer.

For proactive companies, the opportunities are considerable. A 2018/2019 report by PwC found that global listed companies could release as much as €1.3 trillion from their balance sheets by addressing poor working capital performance – thereby giving companies access to cash which can be used to invest in R&D, reduce borrowing and support business growth. And current uncertainties in the global trading environment are giving companies even more reason to manage working capital as efficiently as possible.

Solutions like supply chain finance can play a major role in helping companies achieve this. Companies have been using supply chain finance to optimize working capital for decades. That said, the companies that have been doing this the longest are seeking out further opportunities for improvement, such as consolidating programs across different continents. They’re also exploring the use of supply chain finance to free up trapped cash in restricted markets.

Meanwhile, companies are increasingly seeking programs that allow them to offer supply chain finance to their whole supplier base, rather than focusing only on their 50 or 100 largest suppliers.

Working capital management techniques

The impact of a working capital management program goes far beyond the company implementing the program. Any steps you take to improve your own working capital position could have a negative impact on your suppliers – and those suppliers may well face higher financing costs than you.

Naturally, this can be an obstacle when it comes to developing strong relationships with your suppliers. And if your suppliers find it difficult to fulfil their orders, you may feel the strain too. So when you’re optimizing your own working capital, you’ll need to consider the impact on your whole supply chain.

This isn’t always easy. Working capital affects different parts of the organization which may have competing goals, so it’s essential to align treasury, AP and procurement with shared strategies and objectives. Likewise, objective measurements should be used to gauge the program’s success.

Approaches to working capital management

As a leading working capital solutions provider, we’re committed to helping you optimize working capital for you and your suppliers. What’s more, we’ve developed sophisticated tools that draw upon the insights we glean by handling over a million supplier interactions every day.

Our working capital management solutions include:

  • Supply chain finance. Using our supply chain finance solution, you can benefit from longer payment terms while giving your suppliers access to third-party financing – thereby improving their DSO.
  • Dynamic discounting. Dynamic discounting allows you to take advantage of early payment discounts – meaning you can gain attractive returns on your surplus cash while your suppliers get paid early.
  • Flexible funding. Our flexible funding model allows you to switch seamlessly between dynamic discounting and supply chain finance as your working capital needs evolve. I explained the benefits of a flexible funding approach at EuroFinance’s Working Capital & Supply Chain Finance event in February.
  • Intelligent platform. Using our platform, you can provide treasury, procurement, finance and AP with a shared set of working capital metrics – helping you overcome internal siloes while viewing your cash position and gaining valuable insights into your working capital performance.
  • Invoice automation. Our invoicing solutions allow buyers to streamline AP processes and accelerate invoice approval – meaning you can give suppliers more time to access early payments.

Working capital management in practice

AstraZeneca worked with Taulia to implement a supply chain finance program which has been offered to 4,000 vendors in Sweden, the U.K. and the U.S. Watch this video.

To learn more about how Taulia can help you optimize working capital across your business, get in touch with us today.


Working capital FAQs

How do I calculate working capital?

Working capital is defined as current assets minus current liabilities. Key metrics include Days Sales Outstanding (DSO), Days Payables Outstanding (DPO) and Days Inventory Outstanding (DIO). These can be used to generate the Cash Conversion Cycle, calculated as CCC = DIO + DSO – DPO.

How important is working capital management?

Effective working capital management is fundamental to the health of any business, as it ensure companies have sufficient funds to meet their short-term obligations. By taking steps to optimize their working capital, companies can also free up cash to invest in R&D and business growth, as well as potentially reducing debt.

What are the potential obstacles to effective working capital management?

Working capital affects different parts of the organization that may have different or competing priorities, so areas such as treasury, AP and procurement will need to be aligned with shared objectives. Companies also need to consider how steps taken to optimize their own working capital could affect the working capital position of their suppliers.