Enterprises struggling with working capital

To improve their financial maneuvering room, many German enterprises keep up all efforts to improve their liquidity. A survey is now shedding light on how they go about it.

By Sascha Alexander

A few things still need improvement in working capital management – that's the result of a recent survey among 501 executives of the German business community (owners, managing directors, and board members). The survey had been jointly conducted by the Institut für Demoskopie (Institute for Public Opinion Polls and Research) in Allensbach and the Kerkhoff Competence Center of Supply Chain Management at the University of St. Gallen.

According to the survey, a total of 62 percent of all interviewed companies with a workforce of more than 1,000 is making efforts to further reduce their working capital (net current assets). The same holds true for one third of the smaller mid-sized businesses with fewer than 250 employees.

Strategies in working capital

According to the study, especially three measures are widespread in a reduction of net current assets:

• Virtually all companies (94 percent) try to reduce their inventories;
Many large companies with more than 1,000 employees (79 percent) want to optimize their receivables and claims management; for smaller companies, the figure is somewhat lower (55 percent).
• One third of the smaller mid-sized companies increase their liabilities to suppliers – it's nearly one half with large companies.

Looking at the entire value added chain

Basically and in view of the results, some leeway thus still remains regarding the working capital. According to the study's authors, company executives should look at the entire value added chain: From purchasing via production all the way to the sales of goods. "Payment terms in purchasing must be changed such that goods received need to be paid as late as possible", that's the general recommendation by Managing Director Gerd Kerkhoff. "At the same time, it needs to be examined which delivery concepts are viable to reduce inventories."

Tips for more liquidity

In concrete terms, inventory control might be left to the suppliers, or delivery could be completely changed over to just-in-time to keep stocks small. Shorter setup times, optimized routes and smaller lot sizes could reduce the throughput times in production.

Moreover, ways would have to be found to convince product buyers to pay for their goods as early as possible and to receive them very fast (more on the practice in claims management is to be found here). Factoring would also be a possibility to bring cash as early as possible into the company.

Financing via outside capital

Why companies should work on a reduction of their working capital to make themselves more independent of the capital market is shown, according to the survey, by the currently usual financing practice in companies:

About half the companies use outside capital to finance investments, according to the study. Fifteen percent of the companies are even financed predominantly via outside capital. One in five smaller mid-sized companies must predominantly fall back on outside capital; that ratio is only one in ten for large companies with a workforce of more than 1,000.

Bank loans for smaller companies

For 84 percent of smaller companies, capital procurement is primarily via bank loans; 21 percent of them finance investments through shareholder loans. But there are hardly any other ways of financing.

Bonds and shareholder loans for major companies

This is quite different for major German companies: Only 57 percent of them use bank loans for capital procurement. Every tenth major company collects capital via bond issues; 22 percent fall back on shareholder loans.

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