Think working capital isn't important to your business? Think again. It doesn't matter how clever your products or how keen your customers, if you haven't got working capital on hand, you'll be out of business in the blink of an eye.
/Harvard Business Review/
What is working capital:
The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities
/Oxford dictionaries/
By definition: working capital = current assets – current liabilities.
Working capital is useful to show the operating liquidity of a company and how the company manages its business.
K&G Services has a strategic focus on operating working capital management. Compared to Working capital, Operating working capital narrows the scope of Current assets and Current liabilities by strictly taking into account operating current assets (Accounts receivable and inventory) and current liabilities (Accounts payable).
To understand the nature of the program, here are the simple definitions of the main elements, which you can easily find on the balance sheet of the company:
• Accounts Payable:
An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.
• Inventory:
The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.
• Accounts receivable:
Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.
K&G Services has a mission to raise financial awareness at their partners and to launch a sustainable change management in sake of profitability, effectiveness and a less stressed organization. Therefore the calculation of working capital and cash conversion cycle has to be as simple as possible. You can find the KPIs below.
• Days Sales Outstanding (DSO): AR/(net annualized sales/365)
Measures average collection period for sales. Computed as trade receivables (net of allowance for doubtful accounts, plus financial receivables), divided by net sales per day. A decrease in DSO represents an improvement, an increase indicates deterioration.
• Days Inventory Outstanding (DIO): inventory/(annualized net sales/365)
Measures average time required to convert materials into finished goods and then to sell those goods. Computed as inventories divided by sales* per day. A decrease in DIO represents an improvement, an increase indicates deterioration.
• Days Payables Outstanding (DPO): AP/(net annualized sales/365)
Measures average payment period for purchases and costs. Computed as trade payables divided by sales* per day. An increase in DPO represent an improvement, a decrease indicates deterioration.
• Days Working Capital (DWC), or Cash Conversion Cycle (CCC): CCC= DSO+DIO-DPO
Measures the length of time between when a company makes payments and when it receives cash. Reducing CCC represents improvement, whereas an increasing CCC represents deterioration.
*Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DII. Using net sales across each working capital component allows a balanced comparison across each DWC/CCC. Whether you use net sales or cost of sales depends on which provides your company with the best information you can work with.
Calculating these KPIs are not always easy but manageable. The challenge is to understand that behind these few numbers there are people and processes. To improve your working capital you have to change your and your colleagueseveryday life. We are giving you a helping hand to find the ways to improve your business processes from the smallest details to the largest strategic decisions related to the three key areas. The result is more satisfied stakeholders: owners, employee, customersand vendors.
Working capital management:
Most companies can release significant amounts of cash from their balance sheets by managing working capital more actively. In these times of economic uncertainty and reduced access to credit, this is the cheapest source of funds and it is available to most businesses.
The fundamental principles of Working Capital are clear: reduce inventory and receivables whilst increasing payables balances.
What we can do for you
• Complete a working capital benchmarking exercise to identify potential improvement opportunities
• Perform a diagnostic review to identify ‘quick wins’ and longer-term working capital improvement opportunities
• Development of detailed action plans for implementation to generate cash and make sustainable improvements
Why US
Our people have many years of experience at delivering world class working capital performance both as consultants and from time spent in Industry.
Click to see more ABOUT US and about our 3K PROGRAM.
If you have any questions or you want to have a free consultation, please contact us and/or request an offer. Our consultants will call or write you within a day.