There is liquidity in the WC

A company which is assets rich and profitable, could yet come into serious troubles if it turns short of liquidity:  if its assets cannot readily be converted into cash it may start delaying payment to suppliers or employees, increase its debt or worse miss essential payments. Starting the negative spiral is never a good idea.

If your company is in liquidity distress, one of the best place to start looking for money is the Working Capita (abbreviated WC). The WC is the operating liquidity available and necessary to a business in order to be able to perform their business.

A WC can be “gross”, when it equals to current assets, or “net” when is calculated as current assets minus current liabilities and is affected by the way a company manages inventories, accounts receivable and payable, and cash.

The effective management of these items infers a close cooperation between finance and sales functions.

Here some examples:

Account receivables: They are good if your clients pay in due time and according to the contractual provisions. Your Day sales operation (DSO), a performance indicator that show how fast or slow your customer pay you is a good management tool to steer the sales. It can vary from industry to industry and from region to region but the principle is: the sooner the client pay, the better. By assessing the reasons why your client are paying you late you learn a lot more about the market, your own company and the quality of your products and services than hours spent in the board room. Sales will hate you for speaking to the client (which is something you should do with their consent) but it shed a lot of light on gray areas. By talking to few customers, I realized that our R&D department was spending money and resources on products nobody wanted. The sales representative should control a dunning list, however if the client is in delay beyond certain limits, finance will need to take over.

Inventory: one of my preferred blocks. If you start analyze inventory (god forbid it) you may find a lot of skeletons, poison bottles and little or horrendous secrets. Your Inventory days ration will tell you for how many days you hold an item in stock. Examples of what you can find: Overstocked items. You may discover that your local guy can order from you or other supply without really any authorisation. Is your signature guideline in place? Is that amount of stock really necessary to run the business or the guy loading the warehouse would like to have a comfortable life, which is independent form lead times? The frequency with which items move will tell you finally how much trash you have which is out of market, returned from your client (often hidden by the sales guys in a dusty corner of the warehouse).

Here my piece of advise: if your company is short in cash, before going to the bank and ask for more debt, you should make sure that you squeeze all the liquidity you can from where it is available. There is liquidity in the WC!

Do not be shy in asking what, where, when, who and why on a regular basis. You may find many surprises but you can be pretty much sure that the money will stop flushing down the drain. 

In case you need support in Working Capital matters or any other finance/Change management issues in Germany please do contact me.